Long-Term Investing: Gold Versus Stocks

September 20th, 2010

Whew…what a week….! We had a bad cold last week, but we had to keep going.

Half the world’s work is done by people who don’t feel very good, so we soldiered on… We were very busy.

We don’t approve of busy-ness. People who are very busy are usually wasting their time. Or, they are wasting your time. Politicians, for example. They’re on the go day and night – especially at election time. Shaking hands. Appearing at rallies and town hall meetings. Giving interviews. Meeting the voters. Meeting with their staff. Go…go…go… gone!

We would all be better off if they stopped…and thought. A little reflection might help us all.

That’s true of people in business too. Busy-ness feels productive. It feels effective. It looks dynamic and hard-working. But without solid thinking behind it, it is as empty as a whirlwind.

But what are we talking about? What’s this got to do with money?

Well, not much. So let’s move on.

What happened on Friday? Not much. Nothing worth comment.

Gold and stocks both up a little. But so what?

Should you buy stocks? Definitely not. Well, not definitely not. Maybe not. US stocks are likely to underperform over the next 10 years. As we keep saying, they still haven’t yet fulfilled their rendezvous with bear market destiny. When that happens, stock market investors will wish they had their money somewhere else.

Probably the only exceptions are those who take a very, very long-term outlook. Right now, there are some good US companies available at reasonable prices. Altria. Johnson & Johnson. Diamond Offshore Drilling. Today’s price is probably NOT the best price you will ever get. But maybe you don’t care. If you take a long enough perspective, you could be very happy with the kind of returns these companies are likely to deliver. They pay good dividends – and they’re growing. Many US companies are not only US companies. They’re world leaders. With brands that are known all over the globe. Many of these companies are enjoying spectacular growth in their foreign sales.

So, if you’re willing to look far enough into the future…maybe some of these US brand-name companies are worth buying.

Well, what about gold? While US stocks have gone nowhere since 1998, gold has gone up every year. This year it’s up again – 15%. And last week, gold hit record highs on three days.

So, should you buy gold? Again, it depends on what you’re trying to do. Here at The Daily Reckoning, we don’t encourage speculation. So if you buy gold in the hope of making a lot of money, you’re on your own. We don’t recommend it. Gold could go up…or down.

But gold is money. It’s the world’s more reliable money. You could use it to buy stuff during the reign of Caesar Augustus. You can use it to buy stuff now (after converting to paper currency). What’s more, you get about as much stuff per ounce (relatively) now as you did 2,000 years ago.

If you want to save money, save gold. It might go up. It might go down. But it won’t go away.

Bill Bonner
for The Daily Reckoning

Long-Term Investing: Gold Versus Stocks 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:
Long-Term Investing: Gold Versus Stocks




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

Investors Rush Into Gold and Silver as U.S. Treasuries Show Signs Of Weakness

September 20th, 2010

Since the emergence of the European Debt crisis in April 2010, treasuries have been in a strong uptrend as investors have been seeking protection from risky assets.April to August 2010 was a deflationary period, similar to the fourth quarter of 2008 when treasuries soared higher before the massive government stimulus.  Stocks have been in a five month correction.  Now, in September 2010, long term treasuries are suffering a correction and break of long term trend support.

Long term treasuries are unable to find support at the 50 day moving average.  I highlighted a few weeks ago that treasuries appear to be making a top as the Chinese cut back on U.S. debt. The massive efforts from Washington to prevent a double dip appear to be putting a respite in the decline in equity markets.  It also appears that  The Fed will continue to easy monetarily during this crisis as they meet tomorrow and is expected to accommodate further.  The Fed has already stated that they will keep interest rates low well into 2011.  This is very bullish for silver and gold.

Efforts to deflate the currency have succeeded and now the dollar is challenging new lows and breaking through support.  Treasuries have corrected considerably along with the dollar.  Although the policy makers in Washington have revived the equity markets, the long term effect on the dollar and long term debt will be detrimental.  The markets are at resistance now and are very overbought.  I would consider being careful on this rally as a deteriorating currency and high unemployment will put pressure on the consumer.

The precious metals long term uptrend is in fact the best place to be during this ongoing debt crisis.  Now there is a massive flow to silver and gold.  I would not go chasing it now with the masses.  There will always be corrections and sales on gold and silver in a bull market as I highlighted to my readers four weeks ago right before the rally. Silver is especially overextended and could have a  healthy pullback.  There will be sales in the future as profit taking is imminent as it is overextended over its 50 and 200 day moving averages.  Subscribe to my free newsletter for trading signals and strategies at http://goldstocktrades.com.

It appears that the strategies from the central bank are now reflating the economy as gold, silver and base metals have reached new highs, while the dollar and U.S. treasuries are correcting considerably.   I believe the trend of sovereign debt defaults will continue and central banks raising their positions in precious metals.  This is the beginning of a major rush into gold and silver

We are currently seeing a huge transfer of capital into gold, silver and mining stocks.    I believe the best way to invest in emerging markets is to buy gold, silver and base metals that these countries are now importing rather than exporting.  I also see the possibility of the equity market, dollar and treasuries decoupling from silver and gold as they have made extremely upside breakouts since our bullish call on precious metals at the end of July. It has made an explosive move and is extended way above support and moving averages so a pullback is inevitable.  I am a long term silver bull but at this point would wait for a healthy pullback and secondary buypoints will be alerted to my readers first at http://goldstocktrades.com.

Read more here:
Investors Rush Into Gold and Silver as U.S. Treasuries Show Signs Of Weakness

Commodities

Investors Rush Into Gold and Silver as U.S. Treasuries Show Signs Of Weakness

September 20th, 2010

Since the emergence of the European Debt crisis in April 2010, treasuries have been in a strong uptrend as investors have been seeking protection from risky assets.April to August 2010 was a deflationary period, similar to the fourth quarter of 2008 when treasuries soared higher before the massive government stimulus.  Stocks have been in a five month correction.  Now, in September 2010, long term treasuries are suffering a correction and break of long term trend support.

Long term treasuries are unable to find support at the 50 day moving average.  I highlighted a few weeks ago that treasuries appear to be making a top as the Chinese cut back on U.S. debt. The massive efforts from Washington to prevent a double dip appear to be putting a respite in the decline in equity markets.  It also appears that  The Fed will continue to easy monetarily during this crisis as they meet tomorrow and is expected to accommodate further.  The Fed has already stated that they will keep interest rates low well into 2011.  This is very bullish for silver and gold.

Efforts to deflate the currency have succeeded and now the dollar is challenging new lows and breaking through support.  Treasuries have corrected considerably along with the dollar.  Although the policy makers in Washington have revived the equity markets, the long term effect on the dollar and long term debt will be detrimental.  The markets are at resistance now and are very overbought.  I would consider being careful on this rally as a deteriorating currency and high unemployment will put pressure on the consumer.

The precious metals long term uptrend is in fact the best place to be during this ongoing debt crisis.  Now there is a massive flow to silver and gold.  I would not go chasing it now with the masses.  There will always be corrections and sales on gold and silver in a bull market as I highlighted to my readers four weeks ago right before the rally. Silver is especially overextended and could have a  healthy pullback.  There will be sales in the future as profit taking is imminent as it is overextended over its 50 and 200 day moving averages.  Subscribe to my free newsletter for trading signals and strategies at http://goldstocktrades.com.

It appears that the strategies from the central bank are now reflating the economy as gold, silver and base metals have reached new highs, while the dollar and U.S. treasuries are correcting considerably.   I believe the trend of sovereign debt defaults will continue and central banks raising their positions in precious metals.  This is the beginning of a major rush into gold and silver

We are currently seeing a huge transfer of capital into gold, silver and mining stocks.    I believe the best way to invest in emerging markets is to buy gold, silver and base metals that these countries are now importing rather than exporting.  I also see the possibility of the equity market, dollar and treasuries decoupling from silver and gold as they have made extremely upside breakouts since our bullish call on precious metals at the end of July. It has made an explosive move and is extended way above support and moving averages so a pullback is inevitable.  I am a long term silver bull but at this point would wait for a healthy pullback and secondary buypoints will be alerted to my readers first at http://goldstocktrades.com.

Read more here:
Investors Rush Into Gold and Silver as U.S. Treasuries Show Signs Of Weakness

Commodities

Gold, Oil and China

September 20th, 2010

It’s been a lively year for both gold and oil investors but the year to remember may be the one ahead.

Goldman Sachs is forecasting a 27 percent jump in energy and a 17 percent rise in precious metals over the next 12 months. On the oil side, Goldman credits a rebound in industrial production for a 520,000-barrel-per-day increase in China’s implied oil demand in August (year over year). As you can see from the left-side chart, Chinese oil demand has remained a fairly consistent story going back several years.

Globally, world oil demand was up 2.4 million barrels per day on a year-over-year basis in August, according to Goldman Sachs (see right-side chart). Rising demand from emerging nations has created a 600,000-barrel-per-day global supply deficit since May. This month saw a reversal in the U.S., with weeks of growing inventory surpluses swinging to draw-downs after Labor Day.

The long-term prospects for oil haven’t changed. Estimates from Wood Mackenzie and Deutsche Bank show that global oil production will decline 12 percent by 2015 without new investment. Production rates in Britain, Australia, U.S. offshore and Norway have declined 15 percent or more since 2000. Finding future reserves is increasingly difficult and costly, so prices will have to be higher to make developing these reserves worthwhile.

New all-time high prices for gold this week leave many to wonder if we’re nearing a top, but we think gold’s bull run may have further to go. Since mid-August, prices have risen on the back of a significant increase in net long positions on the COMEX and investor interest is near highs for the year. In addition, central bankers have also been stocking up on gold – for the first time since 1988, they will be net buyers of bullion in 2010.

 

 

This could also be just the beginning. BCA Research says gold is in a bull market and will “remain that way until macro and/or industry-specific trends change significantly.” BCA cites low real interest rates and high policy uncertainty as the twin engines powering gold higher.

Washington has yet to show how it will reduce the gaping federal deficit, and the Federal Reserve is expected to keep interest rates near zero well into 2011. When you throw in a possible return to quantitative easing, the prospects for higher gold prices look even stronger.

The sturdiest pillar supporting both gold and oil should continue to be China. Even though China was recently crowned the world’s largest energy consumer, the country’s energy demands are still small on a per-capita basis. And for gold, Chinese demand—government, investor and jewelry consumers—remains strong despite high prices. The World Gold Council predicts gold consumption there could double in the coming decade.

Fears of a bubble bursting in the Chinese economy have been deflated as the country prepares itself for a soft landing. Analysts at CLSA says China will remain “the world’s best consumption story” due to income growth, moderate inflation and low household debt. They expect GDP growth to be just under 10 percent this year, and 8 percent to 9 percent in 2011.

There will likely be short-term volatility in commodities, but we believe the enduring strength of the global growth story being led by China and other key emerging markets should be a powerful demand driver in the years ahead.

Regards,

Frank Holmes,
for The Daily Reckoning

P.S. To read more of my insights visit the gold section of my investment blog, Frank Talk.

Gold, Oil and China 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:
Gold, Oil and China




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

Gold, Oil and China

September 20th, 2010

It’s been a lively year for both gold and oil investors but the year to remember may be the one ahead.

Goldman Sachs is forecasting a 27 percent jump in energy and a 17 percent rise in precious metals over the next 12 months. On the oil side, Goldman credits a rebound in industrial production for a 520,000-barrel-per-day increase in China’s implied oil demand in August (year over year). As you can see from the left-side chart, Chinese oil demand has remained a fairly consistent story going back several years.

Globally, world oil demand was up 2.4 million barrels per day on a year-over-year basis in August, according to Goldman Sachs (see right-side chart). Rising demand from emerging nations has created a 600,000-barrel-per-day global supply deficit since May. This month saw a reversal in the U.S., with weeks of growing inventory surpluses swinging to draw-downs after Labor Day.

The long-term prospects for oil haven’t changed. Estimates from Wood Mackenzie and Deutsche Bank show that global oil production will decline 12 percent by 2015 without new investment. Production rates in Britain, Australia, U.S. offshore and Norway have declined 15 percent or more since 2000. Finding future reserves is increasingly difficult and costly, so prices will have to be higher to make developing these reserves worthwhile.

New all-time high prices for gold this week leave many to wonder if we’re nearing a top, but we think gold’s bull run may have further to go. Since mid-August, prices have risen on the back of a significant increase in net long positions on the COMEX and investor interest is near highs for the year. In addition, central bankers have also been stocking up on gold – for the first time since 1988, they will be net buyers of bullion in 2010.

 

 

This could also be just the beginning. BCA Research says gold is in a bull market and will “remain that way until macro and/or industry-specific trends change significantly.” BCA cites low real interest rates and high policy uncertainty as the twin engines powering gold higher.

Washington has yet to show how it will reduce the gaping federal deficit, and the Federal Reserve is expected to keep interest rates near zero well into 2011. When you throw in a possible return to quantitative easing, the prospects for higher gold prices look even stronger.

The sturdiest pillar supporting both gold and oil should continue to be China. Even though China was recently crowned the world’s largest energy consumer, the country’s energy demands are still small on a per-capita basis. And for gold, Chinese demand—government, investor and jewelry consumers—remains strong despite high prices. The World Gold Council predicts gold consumption there could double in the coming decade.

Fears of a bubble bursting in the Chinese economy have been deflated as the country prepares itself for a soft landing. Analysts at CLSA says China will remain “the world’s best consumption story” due to income growth, moderate inflation and low household debt. They expect GDP growth to be just under 10 percent this year, and 8 percent to 9 percent in 2011.

There will likely be short-term volatility in commodities, but we believe the enduring strength of the global growth story being led by China and other key emerging markets should be a powerful demand driver in the years ahead.

Regards,

Frank Holmes,
for The Daily Reckoning

P.S. To read more of my insights visit the gold section of my investment blog, Frank Talk.

Gold, Oil and China 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:
Gold, Oil and China




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

Join Corey for a Wednesday Webinar on Trading Intraday Divergences

September 20th, 2010

I’m pleased to announce that I will be conducting an educational webinar this Wednesday after market close at 4:30 EST / 3:30 CST.

Trading Intraday Price Reversals Using Momentum Divergences.”

The event is sponsored by ICE Futures and eSignal Learning, and hosted by Trader Kingdom.

Event registration is free, and you can sign-up to attend directly from Trader Kingdom’s information page.

You can also read the full event description there on topics I will discuss during the hour-long training session.

Among the topics covered, I will discuss:

  • How the physics concept of “momentum” translates into trading the intraday US Dollar Index and Russell 2000 mini futures contracts from ICE
  • What indicators are best for identifying divergences
  • Why traders tend to skip-over or doubt divergences in real time
  • The difference between a ’single swing’ and ‘multi-swing’ divergence
  • How to use divergences to your advantage both to exit a profitable trade and then re-enter at the lowest-risk price
  • The difference in ‘edge’ between employing a conservative or aggressive entry tactic

I will explain these concepts and show recent intraday examples from the Russell-2000 Index mini-futures (@TF) and Dollar-Index (@DY) Futures contract, though intraday divergences are applicable to any market (or timeframe) you trade.

I will also answer the following questions:

How can you spot a market that is likely to reverse its short-term trend?

Where do you enter and place a stop when you believe price is signaling a reversal trade opportunity?

Register and attend early, as the event attendance is limited to 400 live participants.

If you are unable to attend, or unable to enter the room at the time of the event, Trader Kingdom will email you a recording of the presentation after Wednesday, but you will have to be registered to receive the link to view the archived presentation.

Thank you to ICE, eSignal, and Trader Kingdom for sponsoring the event!  Be sure to check out their other educational pages for additional upcoming webinar events.

I look forward to seeing you there!

Corey Rosenbloom, CMT

Read more here:
Join Corey for a Wednesday Webinar on Trading Intraday Divergences

Uncategorized

Join Corey for a Wednesday Webinar on Trading Intraday Divergences

September 20th, 2010

I’m pleased to announce that I will be conducting an educational webinar this Wednesday after market close at 4:30 EST / 3:30 CST.

Trading Intraday Price Reversals Using Momentum Divergences.”

The event is sponsored by ICE Futures and eSignal Learning, and hosted by Trader Kingdom.

Event registration is free, and you can sign-up to attend directly from Trader Kingdom’s information page.

You can also read the full event description there on topics I will discuss during the hour-long training session.

Among the topics covered, I will discuss:

  • How the physics concept of “momentum” translates into trading the intraday US Dollar Index and Russell 2000 mini futures contracts from ICE
  • What indicators are best for identifying divergences
  • Why traders tend to skip-over or doubt divergences in real time
  • The difference between a ’single swing’ and ‘multi-swing’ divergence
  • How to use divergences to your advantage both to exit a profitable trade and then re-enter at the lowest-risk price
  • The difference in ‘edge’ between employing a conservative or aggressive entry tactic

I will explain these concepts and show recent intraday examples from the Russell-2000 Index mini-futures (@TF) and Dollar-Index (@DY) Futures contract, though intraday divergences are applicable to any market (or timeframe) you trade.

I will also answer the following questions:

How can you spot a market that is likely to reverse its short-term trend?

Where do you enter and place a stop when you believe price is signaling a reversal trade opportunity?

Register and attend early, as the event attendance is limited to 400 live participants.

If you are unable to attend, or unable to enter the room at the time of the event, Trader Kingdom will email you a recording of the presentation after Wednesday, but you will have to be registered to receive the link to view the archived presentation.

Thank you to ICE, eSignal, and Trader Kingdom for sponsoring the event!  Be sure to check out their other educational pages for additional upcoming webinar events.

I look forward to seeing you there!

Corey Rosenbloom, CMT

Read more here:
Join Corey for a Wednesday Webinar on Trading Intraday Divergences

Uncategorized

The End of Social Security as We Know It

September 20th, 2010

On September 30, America will quietly begin a generational shift. This will be the final day of the government’s fiscal year 2010, and consequentially, a very notable day for Social Security. September 30 will be the last day – maybe for a long time – that Social Security could possibly be operating at a surplus.

Back in March, the Congressional Budget Office (CBO) admitted that most Social Security funding projections were way off, and that sometime in 2010 the program would begin paying out more than it’s taking in. In August, the Social Security Board of Trustees said much of the same, that they too were drastically revising previous solvency projections. Just a year ago, both agencies forecast that the Social Security Trust Fund would stay out of the red until 2016. This year, they said 2010… As in, it’s probably already happened.

According to this year’s FICA/SECA tax receipts and benefit payouts, there’s reason to believe the SS fund dipped into deficit as early as February 2010. But since there’s no “official” government mandated date for when Social Security officially entered the red (we wonder if either agency actually knows) the end of the fiscal year will have to do, for now.

Though there will be some debate over when SS started losing money in 2010, there will be no such discussion in 2011, or the year after, or the year after that…or maybe ever again. Despite 2009 projections completely to the contrary, the CBO and Social Security Trustees now expect the fund to suffer deficits indefinitely. There may be two or three years of surplus if the US economy can avoid a double dip recession, but over the long term, in the words of the SS Board of Trustees, “program costs will permanently exceed revenues.”

CBO Revised Social Security Predictions

(Quick aside: That is one ugly revision. There’s nothing wrong with changing your mind, but someone at the CBO had quite an awakening in 2010.)

In summary of the CBO’s findings, the credit crunch and subsequent “Great Correction” moved a future Social Security crisis into the present tense. In fact, the whole issue is now worse. Stock market crashes and unemployment plights like those we’ve suffered lately have long term, arguably irreversible effects on wages, income inequalities, retirement plans and tax revenues…all of which will pile on top of Social Security at a time when it’s already bearing a heavy load.

But as you might remember, we’ve been here before. A not-so-dissimilar bout of high unemployment and lousy economic growth in the ’70s brought the Social Security fund to a sudden crisis in the early ’80s. By 1982, the powers that be weren’t just fretting over the program entering deficit…they had every reason to believe the Social Security would be out of money in as little as a year.

The Regan Administration’s solution was a bi-partisan study group called The National Commission on Social Security Reform (NCSSR). To lead the commission, Washington hired a man who has since proven to be one of the most unsuccessful monetary and fiscal planners in American history: Alan Greenspan.

Long story short, the Greenspan Commission marked “the end of Social Security as we know it”… or at least as we knew it in 1983. That year the Commission released its findings and recommendations, most of which were gradually implemented over the next decade. Here are some of the basic elements of their reform:

  • Social Security tax rates (including Medicare taxes) rose from 9.35% in 1983 to over 15% by 1990.
  • The minimum age to file for full benefits was slowly raised from 65 to 67.
  • The cost of living adjustment (COLA) was re-engineered to track growth in wages or inflation, whichever is lower. Previously, COLA just rose with inflation.
  • The taxable wage base rose dramatically. In 1983, all individual income over $32,400 was not subject to Social Security taxation. Today that base level is $106,800.
  • Greenspan’s plan offered Social Security coverage (and colluded participation) for most tax-exempt and federal employees that were previously excluded.

Essentially, Greenspan’s fix for Social Security was to take in more money and pay less of it out at a later date. And with the help of a booming American economy through most of the ’80s and ’90s, it worked… until it didn’t. As noted above, we’re just about back to square one.

(The real irony here is that there’s reason to believe there was nothing long-term about Greenspan’s solution in the first place. The Greenspan commission was formed by President Regan’s chief of staff Jim Baker, and it’s an open secret Baker’s key objective was only to make Social Security a non-issue for the 1984 election. As with most administrations, the real crisis was left for the next guy to deal with.)

The current generation of leadership is now “that guy.” Worse yet, this Social Security crisis is larger than the one we faced in 1982, which was a combination of a cyclical economic downturn and SS rules and mechanisms in need of reform. Today we face a structural crisis…they’re called baby boomers.

76 million Americans were born between 1946-1964, the so-called baby boomers. On January 1, 2011, the oldest member of this demographic – the largest America has ever known – will turn 65. At present they make up about a third of the entire US workforce. Taking their place will be Generation X, about 46 million people strong. Forgive us for the back-of-the-envelope math, but that sounds like 30 million fewer contributors to the Social Security fund and tens of millions of new beneficiaries. Hmmm…

When the whole idea of Social Security was first brought to the table, way back in post-Depression FDR days, there were 16 Social Security contributors for every 1 Social Security beneficiary. Today, that ratio is closer to 4:1. By 2030, when America will be bearing the full brunt of retired baby boomers, that ratio will be 2:1. To accommodate that ratio, either recipients will have to get less, or workers will have to pay more. The current method of funding the program is simply no longer applicable.

And there’s a whole other “problem” with current or soon-to-be Social Security beneficiaries: They’ll likely live much longer (and expensive) lives than their parents. In 1935 the average life expectancy was 65, making the minimum age to collect SS almost a cruelly ironic death sentence. Today, the average American will live to around 77… yet the minimum age to collect full benefits has only risen by 2 years. And if you believe tech-savvy people like my colleague Patrick Cox, we are on the verge of generational medical breakthroughs that could expand our life expectancies into the triple digits.

So what happens when the largest demographic America has ever known taps into a fund already in deficit? And what will we do if they…well…won’t die on time?

You can whine about “paying into Social Security every month for the last 40 years and I deserve every penny” till the cows come home… But this is simple, cold math. If you’ve been in the working world that long, you must understand by now the difference between what’s fair and what’s reality. The reality of the moment is this: You must…

  • Prepare to pay more Social Security taxes
  • Prepare to receive less Social Security benefits

As it stands today, there’s just not enough money to fund the Social Security program as we know it. With $2.5 trillion left in the SS warchest, there is no immediate threat to the status quo. But as the SS Board of Trustees forecast in August, “Over [a] 75-year period, the Trust Funds would require additional revenue equivalent to $5.4 trillion in present value dollars to pay all scheduled benefits.” That gap will be filled by borrowing from abroad, taxing at home or slashing the benefits of those yet to retire. Either way, it’s hard to picture a happy ending for Social Security. It’s in your best interest to build a substantial retirement fund of your own and – probably more importantly – one for your children.

Good luck,

Ian Mathias
for The Daily Reckoning

The End of Social Security as We Know It 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 End of Social Security as We Know It




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 End of Social Security as We Know It

September 20th, 2010

On September 30, America will quietly begin a generational shift. This will be the final day of the government’s fiscal year 2010, and consequentially, a very notable day for Social Security. September 30 will be the last day – maybe for a long time – that Social Security could possibly be operating at a surplus.

Back in March, the Congressional Budget Office (CBO) admitted that most Social Security funding projections were way off, and that sometime in 2010 the program would begin paying out more than it’s taking in. In August, the Social Security Board of Trustees said much of the same, that they too were drastically revising previous solvency projections. Just a year ago, both agencies forecast that the Social Security Trust Fund would stay out of the red until 2016. This year, they said 2010… As in, it’s probably already happened.

According to this year’s FICA/SECA tax receipts and benefit payouts, there’s reason to believe the SS fund dipped into deficit as early as February 2010. But since there’s no “official” government mandated date for when Social Security officially entered the red (we wonder if either agency actually knows) the end of the fiscal year will have to do, for now.

Though there will be some debate over when SS started losing money in 2010, there will be no such discussion in 2011, or the year after, or the year after that…or maybe ever again. Despite 2009 projections completely to the contrary, the CBO and Social Security Trustees now expect the fund to suffer deficits indefinitely. There may be two or three years of surplus if the US economy can avoid a double dip recession, but over the long term, in the words of the SS Board of Trustees, “program costs will permanently exceed revenues.”

CBO Revised Social Security Predictions

(Quick aside: That is one ugly revision. There’s nothing wrong with changing your mind, but someone at the CBO had quite an awakening in 2010.)

In summary of the CBO’s findings, the credit crunch and subsequent “Great Correction” moved a future Social Security crisis into the present tense. In fact, the whole issue is now worse. Stock market crashes and unemployment plights like those we’ve suffered lately have long term, arguably irreversible effects on wages, income inequalities, retirement plans and tax revenues…all of which will pile on top of Social Security at a time when it’s already bearing a heavy load.

But as you might remember, we’ve been here before. A not-so-dissimilar bout of high unemployment and lousy economic growth in the ’70s brought the Social Security fund to a sudden crisis in the early ’80s. By 1982, the powers that be weren’t just fretting over the program entering deficit…they had every reason to believe the Social Security would be out of money in as little as a year.

The Regan Administration’s solution was a bi-partisan study group called The National Commission on Social Security Reform (NCSSR). To lead the commission, Washington hired a man who has since proven to be one of the most unsuccessful monetary and fiscal planners in American history: Alan Greenspan.

Long story short, the Greenspan Commission marked “the end of Social Security as we know it”… or at least as we knew it in 1983. That year the Commission released its findings and recommendations, most of which were gradually implemented over the next decade. Here are some of the basic elements of their reform:

  • Social Security tax rates (including Medicare taxes) rose from 9.35% in 1983 to over 15% by 1990.
  • The minimum age to file for full benefits was slowly raised from 65 to 67.
  • The cost of living adjustment (COLA) was re-engineered to track growth in wages or inflation, whichever is lower. Previously, COLA just rose with inflation.
  • The taxable wage base rose dramatically. In 1983, all individual income over $32,400 was not subject to Social Security taxation. Today that base level is $106,800.
  • Greenspan’s plan offered Social Security coverage (and colluded participation) for most tax-exempt and federal employees that were previously excluded.

Essentially, Greenspan’s fix for Social Security was to take in more money and pay less of it out at a later date. And with the help of a booming American economy through most of the ’80s and ’90s, it worked… until it didn’t. As noted above, we’re just about back to square one.

(The real irony here is that there’s reason to believe there was nothing long-term about Greenspan’s solution in the first place. The Greenspan commission was formed by President Regan’s chief of staff Jim Baker, and it’s an open secret Baker’s key objective was only to make Social Security a non-issue for the 1984 election. As with most administrations, the real crisis was left for the next guy to deal with.)

The current generation of leadership is now “that guy.” Worse yet, this Social Security crisis is larger than the one we faced in 1982, which was a combination of a cyclical economic downturn and SS rules and mechanisms in need of reform. Today we face a structural crisis…they’re called baby boomers.

76 million Americans were born between 1946-1964, the so-called baby boomers. On January 1, 2011, the oldest member of this demographic – the largest America has ever known – will turn 65. At present they make up about a third of the entire US workforce. Taking their place will be Generation X, about 46 million people strong. Forgive us for the back-of-the-envelope math, but that sounds like 30 million fewer contributors to the Social Security fund and tens of millions of new beneficiaries. Hmmm…

When the whole idea of Social Security was first brought to the table, way back in post-Depression FDR days, there were 16 Social Security contributors for every 1 Social Security beneficiary. Today, that ratio is closer to 4:1. By 2030, when America will be bearing the full brunt of retired baby boomers, that ratio will be 2:1. To accommodate that ratio, either recipients will have to get less, or workers will have to pay more. The current method of funding the program is simply no longer applicable.

And there’s a whole other “problem” with current or soon-to-be Social Security beneficiaries: They’ll likely live much longer (and expensive) lives than their parents. In 1935 the average life expectancy was 65, making the minimum age to collect SS almost a cruelly ironic death sentence. Today, the average American will live to around 77… yet the minimum age to collect full benefits has only risen by 2 years. And if you believe tech-savvy people like my colleague Patrick Cox, we are on the verge of generational medical breakthroughs that could expand our life expectancies into the triple digits.

So what happens when the largest demographic America has ever known taps into a fund already in deficit? And what will we do if they…well…won’t die on time?

You can whine about “paying into Social Security every month for the last 40 years and I deserve every penny” till the cows come home… But this is simple, cold math. If you’ve been in the working world that long, you must understand by now the difference between what’s fair and what’s reality. The reality of the moment is this: You must…

  • Prepare to pay more Social Security taxes
  • Prepare to receive less Social Security benefits

As it stands today, there’s just not enough money to fund the Social Security program as we know it. With $2.5 trillion left in the SS warchest, there is no immediate threat to the status quo. But as the SS Board of Trustees forecast in August, “Over [a] 75-year period, the Trust Funds would require additional revenue equivalent to $5.4 trillion in present value dollars to pay all scheduled benefits.” That gap will be filled by borrowing from abroad, taxing at home or slashing the benefits of those yet to retire. Either way, it’s hard to picture a happy ending for Social Security. It’s in your best interest to build a substantial retirement fund of your own and – probably more importantly – one for your children.

Good luck,

Ian Mathias
for The Daily Reckoning

The End of Social Security as We Know It 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 End of Social Security as We Know It




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

Aussie Dollar Lead the Currency Rally Against the US Dollar

September 20th, 2010

The currencies are having some fun at the dollar’s expense this morning, and while I’ve always said that the euro (EUR) is the Big Dog, the star performer overnight was the Aussie dollar (AUD)! The Aussie dollar is at a two-year high versus the US dollar, and is beginning to look a bit pricy, compared to the rest of the currencies in the world. But, we’ve seen this in the Aussie dollar plenty of times in the past. The Aussie dollar trades way past “fair value” because of the strong interest rate it pays.

The Aussie dollar is also getting some notice because the Reserve Bank of Australia (RBA) Governor Stevens was in an upbeat mood in his speech last night, saying at one point that “Australia’s growth in an increase from trend to something above trend, and that the fall in inflation over the past two years won’t go much further.”

This kind of talk brought the rate hike campers back in play… Although, I’m thinking that the RBA is finished with rate hikes this year.

Gold is also a star performer this morning, running up $6 to $1,281 – while its partner, silver, is running up to near $21 again…

The euro has traded as high as 1.3120 overnight, and sits, as I write, right at 1.31.

The euro lost ground on Friday, almost immediately after signing off. The 1.3125 level I saw on Friday morning when I came in, continued to fall throughout the morning losing 1-cent before stabilizing. The selling came as a result of new fears that some banks in the Eurozone MAY incur deeper losses from the global financial crisis. The latest Eurozone bank with problems was the Anglo-Irish Bank in Ireland. The Irish Finance Minister said later in the morning that rumors around Ireland needing aid, were not true… Unfortunately, the damage had been done to the psyche of markets and their willingness to think that it was time to leave the so-called “safe haven” dollar, was too early…

I’ve said over and over again, that the euro isn’t out of the woods just yet, and whenever something like this flares up, it proves the point. The good thing is that a euro at 1.30, is far better than on at 1.18, eh?

So… The risk is on again this morning, although not all currencies are as “perky” as the Aussie dollar!

I see where US Treasury Secretary Geithner is still banging on China to allow “significant gains in the renminbi versus the dollar”… All I’ll say about this, is… Have you ever heard of biting the hand that feeds you? Well… I don’t think the US wants to tick China off here, so the likes of Geithner had better tread water carefully… In fact…

China warned US officials against trying to influence its exchange-rate policy by applying pressure. Foreign Ministry spokeswoman Jiang Yu said turning up the heat on the issue would not solve the US’s trade problems with China and could make the situation worse. US criticism of the renminbi’s (CNY) value has been driven by domestic political concern because Democrats fear losses in the midterm election, bank executives and economists said.

Well… Traders in Brazil, believe that Brazilian Central Bank President, Meirelles, is buying $1 billion dollars a day to stem the real’s rise. Think about that for a minute… $1 billion ever day… Remember in 2005, when we had the “tax amnesty” for US corporations doing business overseas to bring their profits home (repatriate) at a reduced tax rate? $300 billion came home, and that brought about a dollar rally for most of 2005… So… If Meirelles can do this for 300-days, he might be able to replicate that dollar rally of 2005.

My guess is that he can’t come close to doing 1/10 of that $300 billion… But, he’s going to hit it hard for as long as his ammunition lasts… And he’s going to have to work hard, because the news from Brazil continues to be the stuff that rate hikes come from…

On Friday I saw that a record 1.95 million jobs were created in Brazil during the first eight months of this year, according to the Labor Ministry. The number is for the formal job sector, with positions that have a signed contract and labor and social protection. The creation brings Brazil’s unemployment rate down to 6.9%…

I would think that an investor wanting to own reals (BRL), would use the “buy on dips” trading platform… Whenever the central bank buys dollars, it represents a dip in reals…

But again, and I try to make sure I mention this any time I talk about buying reals… The real is an emerging market currency, and could very well get caught up in the selling of another emerging market currency. I truly believe that reals should only be bought and held with one’s “speculative” portion of their investment portfolio…

Well, I received my latest Treasury Bulletin on Friday, and I usually go right to the Monthly Treasury Statement… I do this to make certain that the numbers recorded in the media are the actual numbers of the Fed.

Through August, with one month to go, the 2010 deficit is $1,259,597,000. This puts the average month at $114,508,000. So, if we have an average month in September with regards to the budget deficit, the annual figure would be $1,374,105, which would be less than the number posted for 2009 ($1,415,724,000)… I guess we should kick our heels together and say YAHOO!

Forgive me if I skip the celebration… $1.374 trillion is too large of a deficit… Remember when I used to bang on the previous administration for $450 billion deficits?

Now… You don’t think that given the timing of the next monthly deficit posting, being close to the mid-term elections, that there would be any “funny business” or “cooking of the books” do you? Naaaahhhh…. They wouldn’t do that! HA!

I had a reader send me a note the other day, telling me that the latest speech by the former Cartel Chairman, Big Al Greenspan, sounded much like my friend The Mogambo Guru… Greenspan didn’t actually use the Mogambo’s line of: “We’re all freakin’ doomed,” but he sure came close…

And then a reader lambasted me on Friday telling me that I was “deceiving readers” with my talk on the TARP and stimulus, because I’ve not talked about how a lot of the TARP money went into banks to shore up their balance sheets, and not because they were about to fail. Well… If you all feel that way, then I apologize, I was merely trying to point out what a fiasco TARP and stimulus are, and that it has now been documented by the commission in charge of sorting out TARP. I did not, and have never tried to deceive you… Shoot, I even tell you that I’m short, overweight, and bald!

Well… This week’s data will circle the wagons around the FOMC meeting tomorrow… The markets are 50-50 on whether the FOMC announces further quantitative easing or not at this meeting. One thing I’m sure the FOMC will do is reduce their economic outlook, or let me say this… If they don’t reduce their economic outlook then they are liars! And I wouldn’t want to have to explain that one, Lucy…

The data cupboard is empty today, but economic data will be restocked starting tomorrow.

CPI printed last Friday morning for August, and during the month of August, the government tells us that after taking out food and energy, there was no inflation, and that brought the year-on-year number to a 1966 figure. Of course back in 1966, inflation was calculated correctly with no adjustments, book cooking, or substitutions… So… If you’re on board with the government, you only felt 1.1% inflation in the last year… If you’re like me, it felt more like 4 to 5%… So, way to go government! Keep those monthly checks going out with only 1.1% increases! UGH!

Then there was this… The demand for physical gold continues to run at a very high pace, and I truly understand why, which I try to tell you about most days. This got me thinking about the two types of physical gold there are. At EverBank, the metals select program offers the two types of physical gold. The are called Allocated, and Unallocated or pooled. The Allocated type is where a customer specifies what gold coin or bar they wish to buy. Example: American Eagle, Canadian Maple Leaf, etc. When you allocate your purchase of gold, you will have to pay a “premium” or fabrication cost that the dealer charges for ALL purchases. The buyer will then have to pay for either shipping or storage. The Unallocated or pooled type is where a customer buys gold bullion and pools it together with other holders of that bullion. Unallocated is the most cost effective way to buy and hold gold, because there is no “premium” charged, nor do they pay for storage. If at some time in the future you would want your Unallocated balance of gold, turned into Allocated, and shipped to you, all you have to do is pay for the “premium”, and the shipping charges, for you already own the gold. Hope that helps!

To recap… The currencies – led by the star performer, Australian dollar – are stronger versus the dollar this morning. The Aussie dollar got a kick to a two-year high when their Central Bank Governor was very upbeat in a speech last night. The euro is near 1.31. Brazil’s Central Bank continues their attempt to keep the real from getting too strong, by buying $1 billion dollars a day last week! And gold is $1,281 this morning… WOW!

Chuck Butler
for The Daily Reckoning

Aussie Dollar Lead the Currency Rally Against the US Dollar 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:
Aussie Dollar Lead the Currency Rally Against the US Dollar




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

Aussie Dollar Lead the Currency Rally Against the US Dollar

September 20th, 2010

The currencies are having some fun at the dollar’s expense this morning, and while I’ve always said that the euro (EUR) is the Big Dog, the star performer overnight was the Aussie dollar (AUD)! The Aussie dollar is at a two-year high versus the US dollar, and is beginning to look a bit pricy, compared to the rest of the currencies in the world. But, we’ve seen this in the Aussie dollar plenty of times in the past. The Aussie dollar trades way past “fair value” because of the strong interest rate it pays.

The Aussie dollar is also getting some notice because the Reserve Bank of Australia (RBA) Governor Stevens was in an upbeat mood in his speech last night, saying at one point that “Australia’s growth in an increase from trend to something above trend, and that the fall in inflation over the past two years won’t go much further.”

This kind of talk brought the rate hike campers back in play… Although, I’m thinking that the RBA is finished with rate hikes this year.

Gold is also a star performer this morning, running up $6 to $1,281 – while its partner, silver, is running up to near $21 again…

The euro has traded as high as 1.3120 overnight, and sits, as I write, right at 1.31.

The euro lost ground on Friday, almost immediately after signing off. The 1.3125 level I saw on Friday morning when I came in, continued to fall throughout the morning losing 1-cent before stabilizing. The selling came as a result of new fears that some banks in the Eurozone MAY incur deeper losses from the global financial crisis. The latest Eurozone bank with problems was the Anglo-Irish Bank in Ireland. The Irish Finance Minister said later in the morning that rumors around Ireland needing aid, were not true… Unfortunately, the damage had been done to the psyche of markets and their willingness to think that it was time to leave the so-called “safe haven” dollar, was too early…

I’ve said over and over again, that the euro isn’t out of the woods just yet, and whenever something like this flares up, it proves the point. The good thing is that a euro at 1.30, is far better than on at 1.18, eh?

So… The risk is on again this morning, although not all currencies are as “perky” as the Aussie dollar!

I see where US Treasury Secretary Geithner is still banging on China to allow “significant gains in the renminbi versus the dollar”… All I’ll say about this, is… Have you ever heard of biting the hand that feeds you? Well… I don’t think the US wants to tick China off here, so the likes of Geithner had better tread water carefully… In fact…

China warned US officials against trying to influence its exchange-rate policy by applying pressure. Foreign Ministry spokeswoman Jiang Yu said turning up the heat on the issue would not solve the US’s trade problems with China and could make the situation worse. US criticism of the renminbi’s (CNY) value has been driven by domestic political concern because Democrats fear losses in the midterm election, bank executives and economists said.

Well… Traders in Brazil, believe that Brazilian Central Bank President, Meirelles, is buying $1 billion dollars a day to stem the real’s rise. Think about that for a minute… $1 billion ever day… Remember in 2005, when we had the “tax amnesty” for US corporations doing business overseas to bring their profits home (repatriate) at a reduced tax rate? $300 billion came home, and that brought about a dollar rally for most of 2005… So… If Meirelles can do this for 300-days, he might be able to replicate that dollar rally of 2005.

My guess is that he can’t come close to doing 1/10 of that $300 billion… But, he’s going to hit it hard for as long as his ammunition lasts… And he’s going to have to work hard, because the news from Brazil continues to be the stuff that rate hikes come from…

On Friday I saw that a record 1.95 million jobs were created in Brazil during the first eight months of this year, according to the Labor Ministry. The number is for the formal job sector, with positions that have a signed contract and labor and social protection. The creation brings Brazil’s unemployment rate down to 6.9%…

I would think that an investor wanting to own reals (BRL), would use the “buy on dips” trading platform… Whenever the central bank buys dollars, it represents a dip in reals…

But again, and I try to make sure I mention this any time I talk about buying reals… The real is an emerging market currency, and could very well get caught up in the selling of another emerging market currency. I truly believe that reals should only be bought and held with one’s “speculative” portion of their investment portfolio…

Well, I received my latest Treasury Bulletin on Friday, and I usually go right to the Monthly Treasury Statement… I do this to make certain that the numbers recorded in the media are the actual numbers of the Fed.

Through August, with one month to go, the 2010 deficit is $1,259,597,000. This puts the average month at $114,508,000. So, if we have an average month in September with regards to the budget deficit, the annual figure would be $1,374,105, which would be less than the number posted for 2009 ($1,415,724,000)… I guess we should kick our heels together and say YAHOO!

Forgive me if I skip the celebration… $1.374 trillion is too large of a deficit… Remember when I used to bang on the previous administration for $450 billion deficits?

Now… You don’t think that given the timing of the next monthly deficit posting, being close to the mid-term elections, that there would be any “funny business” or “cooking of the books” do you? Naaaahhhh…. They wouldn’t do that! HA!

I had a reader send me a note the other day, telling me that the latest speech by the former Cartel Chairman, Big Al Greenspan, sounded much like my friend The Mogambo Guru… Greenspan didn’t actually use the Mogambo’s line of: “We’re all freakin’ doomed,” but he sure came close…

And then a reader lambasted me on Friday telling me that I was “deceiving readers” with my talk on the TARP and stimulus, because I’ve not talked about how a lot of the TARP money went into banks to shore up their balance sheets, and not because they were about to fail. Well… If you all feel that way, then I apologize, I was merely trying to point out what a fiasco TARP and stimulus are, and that it has now been documented by the commission in charge of sorting out TARP. I did not, and have never tried to deceive you… Shoot, I even tell you that I’m short, overweight, and bald!

Well… This week’s data will circle the wagons around the FOMC meeting tomorrow… The markets are 50-50 on whether the FOMC announces further quantitative easing or not at this meeting. One thing I’m sure the FOMC will do is reduce their economic outlook, or let me say this… If they don’t reduce their economic outlook then they are liars! And I wouldn’t want to have to explain that one, Lucy…

The data cupboard is empty today, but economic data will be restocked starting tomorrow.

CPI printed last Friday morning for August, and during the month of August, the government tells us that after taking out food and energy, there was no inflation, and that brought the year-on-year number to a 1966 figure. Of course back in 1966, inflation was calculated correctly with no adjustments, book cooking, or substitutions… So… If you’re on board with the government, you only felt 1.1% inflation in the last year… If you’re like me, it felt more like 4 to 5%… So, way to go government! Keep those monthly checks going out with only 1.1% increases! UGH!

Then there was this… The demand for physical gold continues to run at a very high pace, and I truly understand why, which I try to tell you about most days. This got me thinking about the two types of physical gold there are. At EverBank, the metals select program offers the two types of physical gold. The are called Allocated, and Unallocated or pooled. The Allocated type is where a customer specifies what gold coin or bar they wish to buy. Example: American Eagle, Canadian Maple Leaf, etc. When you allocate your purchase of gold, you will have to pay a “premium” or fabrication cost that the dealer charges for ALL purchases. The buyer will then have to pay for either shipping or storage. The Unallocated or pooled type is where a customer buys gold bullion and pools it together with other holders of that bullion. Unallocated is the most cost effective way to buy and hold gold, because there is no “premium” charged, nor do they pay for storage. If at some time in the future you would want your Unallocated balance of gold, turned into Allocated, and shipped to you, all you have to do is pay for the “premium”, and the shipping charges, for you already own the gold. Hope that helps!

To recap… The currencies – led by the star performer, Australian dollar – are stronger versus the dollar this morning. The Aussie dollar got a kick to a two-year high when their Central Bank Governor was very upbeat in a speech last night. The euro is near 1.31. Brazil’s Central Bank continues their attempt to keep the real from getting too strong, by buying $1 billion dollars a day last week! And gold is $1,281 this morning… WOW!

Chuck Butler
for The Daily Reckoning

Aussie Dollar Lead the Currency Rally Against the US Dollar 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:
Aussie Dollar Lead the Currency Rally Against the US Dollar




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

SPX Breakout – is this Finally It? Tips on Trading Breakouts

September 20th, 2010

This morning, we’re getting a quick surge above the key 1,130 level and I wanted to do a quick update on that and focus on standard tips for trading breakouts – particularly in regard to confirmation and the question “Is this real or a trap?”

First, the Daily Chart so far:

The level is clear – 1,130.  We’re above that now – but look back to June where we “broke out” above the 50 EMA… only to collapse back to new lows in a hideous bull trap.  Treat each breakout individually.

Let’s now zip down to the 5-min current (morning) chart:

I’ve been saying for quite some time – as is the standard practice for breakouts – that ANY break above 1,130 is likely to trigger an initial surge of buying potentially FIRST from short-sellers who are trapped and being forced out via stop-losses.  That’s a Short-Squeeze.

The key is whether BUYERS will step in here to keep supporting this market higher, or if the BEARS are the one causing this surge.  If it’s the bears, we’re likely to collapse back in the range as this rally would “have no legs.”

If it’s the combination of bears BUYING to cover and then bulls/buyers genuinely BUYING the breakout, then we have a Positive Feedback Loop where higher prices force more bears to buy-to-cover, which draws in more bulls to buy, which draws even more bears to buy-to-cover, and so on.  That’s why breakouts can be so violent – like this one appears to be initially.  It’s what you should expect.

Treat each breakout individually – and here’s a few tips for this one:

1.  Aggressive traders will begin positioning now (either covering shorts or buying).  If this is a true breakout, aggressive traders want to position or reposition early.

2.  Conservative traders will need to WAIT FOR CONFIRMATION before positioning.

There are a few methods for identifying chart confirmation, but the most popular are waiting for a One-Day official CLOSE above 1,130, or even demanding that price close TWO days above 1,130 (before positioning).  That will reduce the chance of a whipsaw (getting caught the wrong way in what ultimately is a bull trap) but will cause a late entry… or exit if short.

Other methods include percentage functions (say, demanding that price move or close 1% above 1,130, which would be about 22 points, or an official trigger of 1,152.

Keep in mind there are two major factors (that I can think of) that affect this breakout:

1.  President Obama’s speech/town-hall later today at 12:00 EST.  A major announcement could send the market further rallying higher, or collapsing back under 1,130.  Most likely, he won’t say anything that hurts the market.

2.  The Federal Reserve Announcement at 2:15 EST Tuesday.

Again, a major announcement could send this breakout surging higher or collapsing lower.  Most likely, the Fed will announce something “bullish” such as a continuation of Quantitative Easing and isn’t expected to deliver any earth-shattering negative economic news.

If you’re an active trader, you’re likely participating in this move but if you have to make the “What do I do with a breakout of a few points?” question, you might want to apply one of the conservative “prove it to me” strategies above, or wait to see the market response from the Federal Reserve.

And it’s possible this initial breakout is in part due to traders/investors EXPECTING good news either from the President or from the Federal Reserve… or both.

We shall soon see for sure!

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Read more here:
SPX Breakout – is this Finally It? Tips on Trading Breakouts

Uncategorized

SPX Breakout – is this Finally It? Tips on Trading Breakouts

September 20th, 2010

This morning, we’re getting a quick surge above the key 1,130 level and I wanted to do a quick update on that and focus on standard tips for trading breakouts – particularly in regard to confirmation and the question “Is this real or a trap?”

First, the Daily Chart so far:

The level is clear – 1,130.  We’re above that now – but look back to June where we “broke out” above the 50 EMA… only to collapse back to new lows in a hideous bull trap.  Treat each breakout individually.

Let’s now zip down to the 5-min current (morning) chart:

I’ve been saying for quite some time – as is the standard practice for breakouts – that ANY break above 1,130 is likely to trigger an initial surge of buying potentially FIRST from short-sellers who are trapped and being forced out via stop-losses.  That’s a Short-Squeeze.

The key is whether BUYERS will step in here to keep supporting this market higher, or if the BEARS are the one causing this surge.  If it’s the bears, we’re likely to collapse back in the range as this rally would “have no legs.”

If it’s the combination of bears BUYING to cover and then bulls/buyers genuinely BUYING the breakout, then we have a Positive Feedback Loop where higher prices force more bears to buy-to-cover, which draws in more bulls to buy, which draws even more bears to buy-to-cover, and so on.  That’s why breakouts can be so violent – like this one appears to be initially.  It’s what you should expect.

Treat each breakout individually – and here’s a few tips for this one:

1.  Aggressive traders will begin positioning now (either covering shorts or buying).  If this is a true breakout, aggressive traders want to position or reposition early.

2.  Conservative traders will need to WAIT FOR CONFIRMATION before positioning.

There are a few methods for identifying chart confirmation, but the most popular are waiting for a One-Day official CLOSE above 1,130, or even demanding that price close TWO days above 1,130 (before positioning).  That will reduce the chance of a whipsaw (getting caught the wrong way in what ultimately is a bull trap) but will cause a late entry… or exit if short.

Other methods include percentage functions (say, demanding that price move or close 1% above 1,130, which would be about 22 points, or an official trigger of 1,152.

Keep in mind there are two major factors (that I can think of) that affect this breakout:

1.  President Obama’s speech/town-hall later today at 12:00 EST.  A major announcement could send the market further rallying higher, or collapsing back under 1,130.  Most likely, he won’t say anything that hurts the market.

2.  The Federal Reserve Announcement at 2:15 EST Tuesday.

Again, a major announcement could send this breakout surging higher or collapsing lower.  Most likely, the Fed will announce something “bullish” such as a continuation of Quantitative Easing and isn’t expected to deliver any earth-shattering negative economic news.

If you’re an active trader, you’re likely participating in this move but if you have to make the “What do I do with a breakout of a few points?” question, you might want to apply one of the conservative “prove it to me” strategies above, or wait to see the market response from the Federal Reserve.

And it’s possible this initial breakout is in part due to traders/investors EXPECTING good news either from the President or from the Federal Reserve… or both.

We shall soon see for sure!

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Read more here:
SPX Breakout – is this Finally It? Tips on Trading Breakouts

Uncategorized

Urgent Lessons from Japan

September 20th, 2010

Martin D. Weiss, Ph.D.

Imagine a world where the economy never emerges from recession.

Imagine a time and place in which economists talk first of a double-dip recession, then about a triple-dip recession … and ultimately admit the dire reality of a long, multi-decade depression.

Imagine chronically high unemployment, overwhelming government indebtedness, shrinking population, spreading poverty — even growing rates of homelessness among college graduates.

Think about a 20-year period in which stock investors continually lose fortunes and retirees get nearly zero income on their savings, with no end in sight.

A future scenario? No! It’s the here-and-now scenario that I am personally witnessing — in Japan, where I am now.

And it’s the result of government policies that Washington is now also adopting — lock, stock and barrel.

I know because I can compare the Japan of today with the Japan of thirty years ago — when I worked here as an economic analyst. I can see clearly precisely how Japan has sunk into this abyss. And I can see how the U.S., despite its many differences with Japan, is heading down a very similar path.

Americans are focused on paying down debts, not spending.

Tokyo, 1978-1980

Elisabeth and I first went to live in Japan in 1978 so that I could complete fieldwork for my doctoral dissertation on the Japanese financial markets.

As part of the research plan, I was invited by a leading Japanese firm to join them full time. And I became the first U.S. analyst working inside the Japanese securities industry.

Meanwhile, however, our parents back home were bewildered. They had no personal experience with life in East Asia. They had difficulty staying in touch with us from the other side of the world. And they could never quite fathom why we chose to be so far away for so long.

Today, we’re getting a taste of our own medicine: Now, it’s our son Anthony who lives in Tokyo, and now WE are the parents living on the other side of the world.

Much like we did years ago, Anthony has adapted well to the language, culture, and tight spaces. He goes to a Japanese university, works for a Japanese company and plays on a Japanese sports team. And like we did years ago, he often gets so engrossed in his life here, he neglects to stay in touch as often as we’d like him to.

External Sponsorship

Turning Volatility to Your Advantage

For times like these, you need the right tools for rapid market shifts …

At Weiss Capital Management, we’ve just unveiled an aggressive trading strategy with an actual track record, developed over the past decade and specially designed for volatile markets … offering the potential to profit whether stocks rise OR fall.

Click here now to watch:

The Secrets of Dynamic Investing

Fortunately, we have some advantages that our parents didn’t have when we used to live here. From our home in Florida, we can video-chat with our son via the Internet whenever we see him online. We can hop on a plane and join him within 24 hours. And whenever we’re here, we can relive old times — browsing our old neighborhood, visiting old friends, comparing then with now.

And it’s that comparison — between the Japan of 1980 and the Japan of 2010 — that offers some of the most urgent lessons for all Americans.

The Rise and Fall of a World Leader

Thirty years ago, Japan was on its way to becoming the world’s number one economy — not necessarily in terms of GDP, but in many other key aspects: It led the world in technology. Its massive trading companies and financial institutions were the largest in the world. Its trade surpluses and cash savings exceeded those of any other nation on the planet.

But today, Japan is number three in GDP, surpassed this year by China and slipping on nearly every single front where it was leading before — technology, trade and cash.

Thirty years ago, more than 99 percent of college graduates were employed during the critical April hiring season; if more than 1 percent failed to get work, it was considered shocking. Reason: Unlike their counterparts in the U.S., once they miss that window, most become unemployable. Companies view them as rejects, failures. In the next hiring season, it becomes almost impossible for them to get another interview.

A homeless man that I photographed yesterday in a middle-class Tokyo neighborhood — too poor to afford even the cheapest rents; too proud to ask for a handout.
A homeless man that I photographed yesterday in a middle-class Tokyo neighborhood — too poor to afford even the cheapest rents; too proud to ask for a handout.

Today, approximately 20 percent of college graduates are failing to get a job … crawling into a corner at their parents’ home, or worse, on the streets … and never re-entering the job market. In the Japanese context, this is TWENTY times more shocking than anything ever seen in prior generations.

When we lived here 30 years ago, homelessness was virtually non-existent. Today, although still small compared to homelessness in the U.S. and parts of Europe, you can see shanties along Tokyo’s river banks, people living under bridges, and the jobless college grads loitering around major train stations.

On Thursday, Anthony helped Elisabeth add some yen to her prepaid instant electronic debit card, usable at train stations, food stands, department stores, restaurants and countless other outlets all over Japan.
On Thursday, Anthony helped Elisabeth add some yen to her prepaid instant electronic debit card, usable at train stations, food stands, department stores, restaurants and countless other outlets all over Japan.

The crime rate, also still low by U.S. standards, is dramatically higher than it was back then. Prostitution among middle class teens, unheard of thirty years ago, is a real problem. Teenage suicide has soared. Health care, once among the best in the world, has deteriorated.

Casual observers rarely see this. All they typically see is a still-ultramodern, efficient, bustling society.

And indeed, Japan boasts a dazzling array of technology … the world’s most literate population … and even the world’s largest network of lost-and-found offices.

Thank goodness for Japan's efficient national network of Lost and Found Offices — especially for people like me, sometimes leaving my goggles at the pool or my sweater on the subway train! Everything is found and turned in; everything is logged. And so far, after 32 years, their batting average with my lost articles is 100%. I have never truly lost a thing!
Thank goodness for Japan’s efficient national network of Lost and Found Offices — especially for people like me, sometimes leaving my goggles at the pool or my sweater on the subway train! Everything is found and turned in; everything is logged. And so far, after 32 years, their batting average with my lost articles is 100%. I have never truly lost a thing!

But most foreign observers don’t know the Japan of 1980 like we did.

Nor do they venture far beyond the hotels, guided tours or formal business meetings.

Moreover, it’s the hard financial facts that tell the true story of Japan today:

Fact #1. Permanent recession. Since 1990, Japan’s economy has been in a permanent catatonic state — wavering from subpar growth to mild recession. An old friend, formerly director of a major Japanese economic research institute, calls it “the 20-year recession that never really ended and the 20-year recovery that never really began — in other words, a depression.”

Fact #2. Banking dinosaurs. Every major bank that has collapsed in the past 20 years has been patched up with mega-mergers and government aid. In 1999, for example, we saw the massive three-way marriage of the Industrial Bank of Japan, Dai-Ichi Kangyo, and Fuji Banks — all weak institutions loaded with toxic assets. Since then, we’ve seen several more. All have failed to revive the banking sector.

chart Urgent Lessons from Japan

Fact #3. 20-year bear market! Near the end of 1989, Japan’s benchmark Nikkei 225 Index reached an all-time peak of 38,957, promptly crashing by 47 percent in less than nine months … and ever since then, it has failed to recover those losses.

To the contrary …

• At its recent lows in 2009, the Nikkei was down to 7,021, a loss of 82 percent from its all-time high.

• Even after the global stock market recovery that began in March of last year, the Nikkei is at just 9,321, still down 76 percent from its highs!

• Since its first bust in late 1989, the Nikkei has enjoyed five major rallies. Each one raised investor hopes for an end to the 20-year bear market. And each one has given way to the dire economic realities — a new plunge, new all-time lows, plus big additional losses for investors.

Where Did Japan Go Wrong?

Japan was — and still is — a vibrant modern society of motivated, hard-working individuals. Its chronic malaise is not rooted in its culture or its people. It’s primarily caused by misguided government policy driven by political pressure to achieve the impossible.

Japan was the first major industrial nation to drop interest rates to practically zero and keep them there almost indefinitely.

Japan was the first to bail out so many large banks so consistently.

And Japan has also been the “leader” of fiscal stimulus. Japan launched a stimulus package of 10.7 trillion yen in August 1992 … another for 13.2 trillion in April 1993 … 6.2 trillion in September 1993 … 15.3 trillion in February 1994 … 14.2 trillion in September 1995 … 16.7 trillion in April 1998 … 23.9 trillion in November 1998 … and 18 trillion in November 1999 … plus many more such programs in the 2000s.

Yet after each government-engineered “recovery,” the economy fell back into recession; and after each government-inspired stock market rally, the Nikkei plunged again, falling to still lower lows.

At first, Japanese economists thought what they were witnessing was a “double-dip” recession just like the one we’re beginning to see in the U.S. today. But after subsequent rounds of stimulus also failed, it made little sense to call it a “triple-dip” or “quadruple-dip” recession. Ultimately, they were forced to admit that it was really one long, protracted depression.

Bottom line: Despite all the banking bailouts, stimulus programs, money printing and zero interest rates, all the emperor’s horses and all the emperor’s men could not put the Japanese miracle back together again.

The Japanese economy still suffered two lost decades of deflation, lackluster growth and declining stock prices.

Corporate earnings still fell. Consumers were still pinched.

Japan’s status as a world economic power continued to decline.

Investors lost fortunes and then lost still more fortunes — again and again.

The Wall Street Journal recently explained it this way:

“Keynesian ‘pump-priming’ in a recession has often been tried, and as an economic stimulus, it is overrated. The money that the government spends has to come from somewhere, which means from the private economy in higher taxes or borrowing. The public works are usually less productive than the foregone private investment.”

Several years ago, top Washington officials flew to Tokyo to lecture their Japanese counterparts about the futility and danger of their policies. Yet now, Treasury Secretary Geithner and Fed Chairman Bernanke are pursuing virtually the same policies:

They try to keep dying companies alive.

They want to outlaw the business cycle.

They chase an elusive dream of creating eternal prosperity and an unending bull market.

This Obviously Didn’t Work in Japan.
It Won’t Work in the U.S. Either.

In the real world, companies are born and companies must die. The economy expands and it must also contract. Investors buy and they must also sell.

No government, no matter how powerful, can change this reality. No government can stop the march of time, fool Mother Nature or repeal the law of gravity.

Most people in Japan now see this clearly. They now know how much they’ve been lied to — over and over again.

That’s why Japan has had five prime ministers in the last four years and is going on a sixth. It’s why voters have permanently kicked the ruling party out of office for the first time in modern history. And it’s why they’re now equally mad at the new party in power.

Most Americans are also beginning to see the light: Despite $3.7 trillion in bailouts and money printing … despite a constant barrage of happy talk from Washington … and even after a series of feeble rally attempts on Wall Street … the average American knows that the economy is not passing even the most basic smell test.

Mike Larson has shown you how the housing market stinks to high heaven — a huge, new surge in foreclosures and repossessions … the most people ever on food stamps … the worst overall poverty rate in half a century. The entire concept of middle class is being challenged.

Like in Japan of recent years, this is having dramatic political consequences in America. Nearly anyone in office — whether Democratic or Republican — is vulnerable to severe attacks. A third party is emerging, with the potential to challenge our two-party system of democracy. The entire premise of monetary and fiscal policy — including the powers of Federal Reserve itself — is in its most precarious state since the Great Depression.

If you disagree — if you believe our government has the financial and political superpowers to achieve its Herculean goals — it would make sense to dramatically increase your exposure to financial risk.

But if you agree — if you can see as clearly as I do that the government’s recent adventures are doomed to failure — then you must …

1. Recognize that the latest stock market rally has no legs to stand on.

2. Use it as a SELLING opportunity — to dramatically reduce your exposure to vulnerable investments.

3. For investments that you keep, build a protective shield around your portfolio, including carefully selected hedge positions that are designed to appreciate as markets fall.

4. For money you can afford to play with, aim for large speculative profits from the decline.

Good luck and God bless!

Martin


About Money and Markets

For more information and archived issues, visit http://www.moneyandmarkets.com

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.

Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

From time to time, Money and Markets may have information from select third-party advertisers known as “external sponsorships.” We cannot guarantee the accuracy of these ads. In addition, these ads do not necessarily express the viewpoints of Money and Markets or its editors. For more information, see our terms and conditions.

Commodities, ETF, Mutual Fund, Uncategorized

Urgent Lessons from Japan

September 20th, 2010

Martin D. Weiss, Ph.D.

Imagine a world where the economy never emerges from recession.

Imagine a time and place in which economists talk first of a double-dip recession, then about a triple-dip recession … and ultimately admit the dire reality of a long, multi-decade depression.

Imagine chronically high unemployment, overwhelming government indebtedness, shrinking population, spreading poverty — even growing rates of homelessness among college graduates.

Think about a 20-year period in which stock investors continually lose fortunes and retirees get nearly zero income on their savings, with no end in sight.

A future scenario? No! It’s the here-and-now scenario that I am personally witnessing — in Japan, where I am now.

And it’s the result of government policies that Washington is now also adopting — lock, stock and barrel.

I know because I can compare the Japan of today with the Japan of thirty years ago — when I worked here as an economic analyst. I can see clearly precisely how Japan has sunk into this abyss. And I can see how the U.S., despite its many differences with Japan, is heading down a very similar path.

Americans are focused on paying down debts, not spending.

Tokyo, 1978-1980

Elisabeth and I first went to live in Japan in 1978 so that I could complete fieldwork for my doctoral dissertation on the Japanese financial markets.

As part of the research plan, I was invited by a leading Japanese firm to join them full time. And I became the first U.S. analyst working inside the Japanese securities industry.

Meanwhile, however, our parents back home were bewildered. They had no personal experience with life in East Asia. They had difficulty staying in touch with us from the other side of the world. And they could never quite fathom why we chose to be so far away for so long.

Today, we’re getting a taste of our own medicine: Now, it’s our son Anthony who lives in Tokyo, and now WE are the parents living on the other side of the world.

Much like we did years ago, Anthony has adapted well to the language, culture, and tight spaces. He goes to a Japanese university, works for a Japanese company and plays on a Japanese sports team. And like we did years ago, he often gets so engrossed in his life here, he neglects to stay in touch as often as we’d like him to.

External Sponsorship

Turning Volatility to Your Advantage

For times like these, you need the right tools for rapid market shifts …

At Weiss Capital Management, we’ve just unveiled an aggressive trading strategy with an actual track record, developed over the past decade and specially designed for volatile markets … offering the potential to profit whether stocks rise OR fall.

Click here now to watch:

The Secrets of Dynamic Investing

Fortunately, we have some advantages that our parents didn’t have when we used to live here. From our home in Florida, we can video-chat with our son via the Internet whenever we see him online. We can hop on a plane and join him within 24 hours. And whenever we’re here, we can relive old times — browsing our old neighborhood, visiting old friends, comparing then with now.

And it’s that comparison — between the Japan of 1980 and the Japan of 2010 — that offers some of the most urgent lessons for all Americans.

The Rise and Fall of a World Leader

Thirty years ago, Japan was on its way to becoming the world’s number one economy — not necessarily in terms of GDP, but in many other key aspects: It led the world in technology. Its massive trading companies and financial institutions were the largest in the world. Its trade surpluses and cash savings exceeded those of any other nation on the planet.

But today, Japan is number three in GDP, surpassed this year by China and slipping on nearly every single front where it was leading before — technology, trade and cash.

Thirty years ago, more than 99 percent of college graduates were employed during the critical April hiring season; if more than 1 percent failed to get work, it was considered shocking. Reason: Unlike their counterparts in the U.S., once they miss that window, most become unemployable. Companies view them as rejects, failures. In the next hiring season, it becomes almost impossible for them to get another interview.

A homeless man that I photographed yesterday in a middle-class Tokyo neighborhood — too poor to afford even the cheapest rents; too proud to ask for a handout.
A homeless man that I photographed yesterday in a middle-class Tokyo neighborhood — too poor to afford even the cheapest rents; too proud to ask for a handout.

Today, approximately 20 percent of college graduates are failing to get a job … crawling into a corner at their parents’ home, or worse, on the streets … and never re-entering the job market. In the Japanese context, this is TWENTY times more shocking than anything ever seen in prior generations.

When we lived here 30 years ago, homelessness was virtually non-existent. Today, although still small compared to homelessness in the U.S. and parts of Europe, you can see shanties along Tokyo’s river banks, people living under bridges, and the jobless college grads loitering around major train stations.

On Thursday, Anthony helped Elisabeth add some yen to her prepaid instant electronic debit card, usable at train stations, food stands, department stores, restaurants and countless other outlets all over Japan.
On Thursday, Anthony helped Elisabeth add some yen to her prepaid instant electronic debit card, usable at train stations, food stands, department stores, restaurants and countless other outlets all over Japan.

The crime rate, also still low by U.S. standards, is dramatically higher than it was back then. Prostitution among middle class teens, unheard of thirty years ago, is a real problem. Teenage suicide has soared. Health care, once among the best in the world, has deteriorated.

Casual observers rarely see this. All they typically see is a still-ultramodern, efficient, bustling society.

And indeed, Japan boasts a dazzling array of technology … the world’s most literate population … and even the world’s largest network of lost-and-found offices.

Thank goodness for Japan's efficient national network of Lost and Found Offices — especially for people like me, sometimes leaving my goggles at the pool or my sweater on the subway train! Everything is found and turned in; everything is logged. And so far, after 32 years, their batting average with my lost articles is 100%. I have never truly lost a thing!
Thank goodness for Japan’s efficient national network of Lost and Found Offices — especially for people like me, sometimes leaving my goggles at the pool or my sweater on the subway train! Everything is found and turned in; everything is logged. And so far, after 32 years, their batting average with my lost articles is 100%. I have never truly lost a thing!

But most foreign observers don’t know the Japan of 1980 like we did.

Nor do they venture far beyond the hotels, guided tours or formal business meetings.

Moreover, it’s the hard financial facts that tell the true story of Japan today:

Fact #1. Permanent recession. Since 1990, Japan’s economy has been in a permanent catatonic state — wavering from subpar growth to mild recession. An old friend, formerly director of a major Japanese economic research institute, calls it “the 20-year recession that never really ended and the 20-year recovery that never really began — in other words, a depression.”

Fact #2. Banking dinosaurs. Every major bank that has collapsed in the past 20 years has been patched up with mega-mergers and government aid. In 1999, for example, we saw the massive three-way marriage of the Industrial Bank of Japan, Dai-Ichi Kangyo, and Fuji Banks — all weak institutions loaded with toxic assets. Since then, we’ve seen several more. All have failed to revive the banking sector.

chart Urgent Lessons from Japan

Fact #3. 20-year bear market! Near the end of 1989, Japan’s benchmark Nikkei 225 Index reached an all-time peak of 38,957, promptly crashing by 47 percent in less than nine months … and ever since then, it has failed to recover those losses.

To the contrary …

• At its recent lows in 2009, the Nikkei was down to 7,021, a loss of 82 percent from its all-time high.

• Even after the global stock market recovery that began in March of last year, the Nikkei is at just 9,321, still down 76 percent from its highs!

• Since its first bust in late 1989, the Nikkei has enjoyed five major rallies. Each one raised investor hopes for an end to the 20-year bear market. And each one has given way to the dire economic realities — a new plunge, new all-time lows, plus big additional losses for investors.

Where Did Japan Go Wrong?

Japan was — and still is — a vibrant modern society of motivated, hard-working individuals. Its chronic malaise is not rooted in its culture or its people. It’s primarily caused by misguided government policy driven by political pressure to achieve the impossible.

Japan was the first major industrial nation to drop interest rates to practically zero and keep them there almost indefinitely.

Japan was the first to bail out so many large banks so consistently.

And Japan has also been the “leader” of fiscal stimulus. Japan launched a stimulus package of 10.7 trillion yen in August 1992 … another for 13.2 trillion in April 1993 … 6.2 trillion in September 1993 … 15.3 trillion in February 1994 … 14.2 trillion in September 1995 … 16.7 trillion in April 1998 … 23.9 trillion in November 1998 … and 18 trillion in November 1999 … plus many more such programs in the 2000s.

Yet after each government-engineered “recovery,” the economy fell back into recession; and after each government-inspired stock market rally, the Nikkei plunged again, falling to still lower lows.

At first, Japanese economists thought what they were witnessing was a “double-dip” recession just like the one we’re beginning to see in the U.S. today. But after subsequent rounds of stimulus also failed, it made little sense to call it a “triple-dip” or “quadruple-dip” recession. Ultimately, they were forced to admit that it was really one long, protracted depression.

Bottom line: Despite all the banking bailouts, stimulus programs, money printing and zero interest rates, all the emperor’s horses and all the emperor’s men could not put the Japanese miracle back together again.

The Japanese economy still suffered two lost decades of deflation, lackluster growth and declining stock prices.

Corporate earnings still fell. Consumers were still pinched.

Japan’s status as a world economic power continued to decline.

Investors lost fortunes and then lost still more fortunes — again and again.

The Wall Street Journal recently explained it this way:

“Keynesian ‘pump-priming’ in a recession has often been tried, and as an economic stimulus, it is overrated. The money that the government spends has to come from somewhere, which means from the private economy in higher taxes or borrowing. The public works are usually less productive than the foregone private investment.”

Several years ago, top Washington officials flew to Tokyo to lecture their Japanese counterparts about the futility and danger of their policies. Yet now, Treasury Secretary Geithner and Fed Chairman Bernanke are pursuing virtually the same policies:

They try to keep dying companies alive.

They want to outlaw the business cycle.

They chase an elusive dream of creating eternal prosperity and an unending bull market.

This Obviously Didn’t Work in Japan.
It Won’t Work in the U.S. Either.

In the real world, companies are born and companies must die. The economy expands and it must also contract. Investors buy and they must also sell.

No government, no matter how powerful, can change this reality. No government can stop the march of time, fool Mother Nature or repeal the law of gravity.

Most people in Japan now see this clearly. They now know how much they’ve been lied to — over and over again.

That’s why Japan has had five prime ministers in the last four years and is going on a sixth. It’s why voters have permanently kicked the ruling party out of office for the first time in modern history. And it’s why they’re now equally mad at the new party in power.

Most Americans are also beginning to see the light: Despite $3.7 trillion in bailouts and money printing … despite a constant barrage of happy talk from Washington … and even after a series of feeble rally attempts on Wall Street … the average American knows that the economy is not passing even the most basic smell test.

Mike Larson has shown you how the housing market stinks to high heaven — a huge, new surge in foreclosures and repossessions … the most people ever on food stamps … the worst overall poverty rate in half a century. The entire concept of middle class is being challenged.

Like in Japan of recent years, this is having dramatic political consequences in America. Nearly anyone in office — whether Democratic or Republican — is vulnerable to severe attacks. A third party is emerging, with the potential to challenge our two-party system of democracy. The entire premise of monetary and fiscal policy — including the powers of Federal Reserve itself — is in its most precarious state since the Great Depression.

If you disagree — if you believe our government has the financial and political superpowers to achieve its Herculean goals — it would make sense to dramatically increase your exposure to financial risk.

But if you agree — if you can see as clearly as I do that the government’s recent adventures are doomed to failure — then you must …

1. Recognize that the latest stock market rally has no legs to stand on.

2. Use it as a SELLING opportunity — to dramatically reduce your exposure to vulnerable investments.

3. For investments that you keep, build a protective shield around your portfolio, including carefully selected hedge positions that are designed to appreciate as markets fall.

4. For money you can afford to play with, aim for large speculative profits from the decline.

Good luck and God bless!

Martin


About Money and Markets

For more information and archived issues, visit http://www.moneyandmarkets.com

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.

Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

From time to time, Money and Markets may have information from select third-party advertisers known as “external sponsorships.” We cannot guarantee the accuracy of these ads. In addition, these ads do not necessarily express the viewpoints of Money and Markets or its editors. For more information, see our terms and conditions.

Commodities, ETF, Mutual Fund, Uncategorized