The All Important Level to Watch on the US Dollar Index

September 24th, 2010

It seems as though the Federal Reserve once again is taking aim squarely at the US Dollar Index with talk of ‘likely’ (or possible) injections of liquidity into the economy in the form of a second major Quantitative Easing plan should the economy falter.

While QE may indeed help stocks and the general economy – should it come to that – the major casualty of a new round of easy monetary policy will likely be the US Dollar – weakened by the injection of liquidity.

That being said, let’s take a quick look at the critically important weekly technical (chart) level to watch in the US Dollar Index, as it reflects confluence support.  Any further breakdown under this support would trigger a major chart sell signal.

Let’s see it on the Weekly Frame:

From a chart perspective, the level to watch is abundantly clear.  It’s roughly the $80.00 index level as seen above.

First, “Round Numbers” often provide their own support or resistance, and serve as a pure price level to watch.

Second, the 200 week Simple Moving Average rests currently at $80.04 – it’s a level that has been important in the past, halting the earlier decline in August.

Finally, the 61.8% Fibonacci Retracement as drawn (from the November 2009 low to the 2010 high) rests at $79.75.

These three chart levels align at the $80 level to form an important confluence support… and thus turning point in the market.

Should the Dollar continue its decline through this confluence support, then that would set-up a potential longer-term target for a move back down to the $74 level seen in late 2009.

Should the Federal Reserve actually go through with its plan to “help the economy in any way possible,” then we can anticipate a move that could take us down to that level.

What seems to be happening now is market expectations of action, rather than actions themselves, but whatever the case, participants in the Dollar will need to watch the $80 level extremely closely.

A break under that level could be quite significant.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

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The All Important Level to Watch on the US Dollar Index

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Join Corey Today for a Lunchtime Chat on Enhancing Retracement Trades

September 24th, 2010

I wanted to invite you to today’s (Friday, September 24) online chat session during lunch – 1:00 EST / 12:00 CST – with the MoneyShow’s eTrading Expo entitled:

Five Ways to Enhance Your Retracement Trades.

The link above is the direct link to my topic page and registration info.

It will be a brief 20-minute online chat session where I will discuss tips and tricks on how to increase your accuracy when trading retracement set-ups and then take a few questions from attendees.

From the official description:

“What are 5 quick ways you can improve your retracement trades? Come chat live with Corey Rosenbloom, CMT as he shares five important technical signals and indicators you can use right now to put on lower risk, higher probably retracement trades”

The eTrading Expo features similar chats all day Friday and Saturday from leading industry experts including Tom Busby, John Carter, Toni Hansen, John Bollinger, and many more.

Full speaker list, details, and registration are located at the MoneyShow’s eTrading Expo introduction page.

There, you will also be able to view/attend free full hour-long session from experts at the Futures and FOREX Expo going on right now in Las Vegas.

I hope to see you there this afternoon!

Corey

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Join Corey Today for a Lunchtime Chat on Enhancing Retracement Trades

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Join Corey Today for a Lunchtime Chat on Enhancing Retracement Trades

September 24th, 2010

I wanted to invite you to today’s (Friday, September 24) online chat session during lunch – 1:00 EST / 12:00 CST – with the MoneyShow’s eTrading Expo entitled:

Five Ways to Enhance Your Retracement Trades.

The link above is the direct link to my topic page and registration info.

It will be a brief 20-minute online chat session where I will discuss tips and tricks on how to increase your accuracy when trading retracement set-ups and then take a few questions from attendees.

From the official description:

“What are 5 quick ways you can improve your retracement trades? Come chat live with Corey Rosenbloom, CMT as he shares five important technical signals and indicators you can use right now to put on lower risk, higher probably retracement trades”

The eTrading Expo features similar chats all day Friday and Saturday from leading industry experts including Tom Busby, John Carter, Toni Hansen, John Bollinger, and many more.

Full speaker list, details, and registration are located at the MoneyShow’s eTrading Expo introduction page.

There, you will also be able to view/attend free full hour-long session from experts at the Futures and FOREX Expo going on right now in Las Vegas.

I hope to see you there this afternoon!

Corey

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Join Corey Today for a Lunchtime Chat on Enhancing Retracement Trades

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If You Own One of These Popular High-Yielders, Pay Attention

September 24th, 2010

If You Own One of These Popular High-Yielders, Pay Attention

My guess is you haven't brought the Restoring American Financial Stability Act (the official name of the just-passed financial reform act) to the lake with you this summer.

At 2,300 pages and filled with 100-word sentences written in complex legalese, the bill — signed into law with much fanfare by President Obama on July 21st — is not exactly light reading.

However, buried in this legislation is Section 171, the Collins Amendment. And this single amendment dramatically impacts income investors. It completely alters the status of one of the more popular high-yield investments.

The good news is that this change will give savvy investors who know where to look the ability to lock in attractive 6-7% yields, investment-grade safety and the potential for capital gains within three to five years.

But this opportunity will not be around for long. The rule changes are already in place. The window is open now, but begins to close in 2013 and shuts completely at the end of 2015.

The high-yield opportunity I'm talking about lies with trust preferred stock, also called trust unit preferred shares or “TruPS.” Banks are usually associated with these shares… but that may be changing. (If you own the preferreds of a bank, they stand a good chance of being trust preferreds.)

You see, TruPS aren't issued directly by the bank. Instead, the bank sets up a new company or off-balance sheet trust. When TruPS are issued, the trust receives the offering proceeds, not the bank. However, the trust then turns around and loans the proceeds to the bank. This convoluted financing was worth it because banks were allowed to count TruPS toward Tier 1 capital — a basic measure of a bank's financial strength. During the height of the financial crisis, banks issued $149 billion of trust preferred stock, according to the Federal Reserve Bank of Philadelphia.

But the financial reform act changes all that. In the future, banks won't be able to include TruPS in Tier 1 capital. The phase out period begins January 1, 2013 and will be complete by December 31, 2015.

This change has major implications for income investors. The biggest is that some banks may choose to redeem their TruPS during the next three to five years. Today, however, these TruPS carry high coupons associated with 30-year investments.

Since TruPS will no longer serve their original purpose of counting as Tier 1 capital, banks will have no reason to hold them. The additional costs of setting up and maintaining the issuing TruPS are unattractive, as well.

That leaves three possible outcomes. First, some banks will choose to do nothing and simply allow their TruPS to mature and not issue any more. Most mature by 2030. Other banks may choose to issue traditional preferred or common stock to shore up Tier 1 capital and then offer TruPS holders the option of converting to these issues.

A third outcome is redemption… and that's where the opportunity lies.

Banks could begin calling TruPS as early as October of this year. If you buy TruPS below their par value (typically $25), this will lead to potential capital gains if the security is called. Of course, that is in addition to the high yields they pay while you wait. Remember that these securities were issued with a long-term outlook, so the yields they pay are associated with 30-50 year bonds instead of the 3-5 year outlook before the law changes.

Action to Take –> If you want to do some hunting for trust preferred securities on your own, I'd recommend QuantumOnline.com. The website has a list of current TruPS on the market that you may want to investigate. (It's free, with registration. Look under than “Income Tables” tab.) Remember, not all TruPS will be called, so you have to be selective. Be on the lookout for those trading below par value and backed by investment-grade credit ratings.


– Carla Pasternak

P.S. –

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A Possible +100% Return From a Company That’s Right Under Your Nose

September 24th, 2010

A Possible +100% Return From a Company That's Right Under Your Nose

I always keep my eyes open for investment opportunities. The best method is to literally keep them open when you are out and about doing your daily business. This is one of the ways I've found multi-bagger stocks over the years.

Everyday items can certainly provide investors with good returns, but these companies tend to be what Peter Lynch called “stalwarts” — slow growing companies paying a nice dividend that should form the cornerstone of your portfolio.

However, it is the companies behind the scenes or right under your nose that provide the big growth opportunities. Many years ago, I invested in a company called Flextronics (Nasdaq: FLEX). At the time, the company was providing a lot of the parts and electronics that went inside things like cellular phones.

While I was in a Subway sandwich store a few weeks ago, I saw the employees rapidly heat up the sandwiches in a TurboChef oven. I thought a super-fast oven was a neat idea, but also dismayed to learn the company had been purchased in 2008 by Middleby Corporation (Nasdaq: MIDD), a company that designs, manufactures and sells commercial foodservice and food processing equipment.

That's when it hit me that ovens must be big business. Every single restaurant at home and abroad uses ovens, not to mention any number of institutions like hospitals and businesses. I wasn't the first to discover the company. The stock has returned about +500% since 2003, and you could've had it during the market bottom of 2009 for about -67% off the current price.

I still like what I see in Middleby, though, and think it has room to grow. This means more than ovens. It means toasters, griddles, charbroilers — lots of hot appliances. And as it turns out, hot is better than cold. Cold appliances like refrigerators are commodities at this point — cooling something doesn't take much imagination or effort, from a design perspective. Hot appliances are far more complicated in design and require more study before purchasing. Heating something also entails several different methods — baking, frying, broiling, etc. That means lots of different products to create and sell.

Middleby's business is truly global, serving dozens of countries across the globe. Ovens are like Coca-Cola (NYSE: KO) — there's no reason why every place that can sell the product shouldn't sell the product. It means infinite expansion possibility.

Another secret to Middleby's success is the same reason why businesses like car dealership maintenance centers are so profitable — service contracts. It isn't enough to just buy a Middleby product, a client will want to purchase a service contract. Appliances will need service no matter how well-made they are. It's a bit like purchasing insurance. It costs Middleby less to come out and service a unit annually than what it collects to contract the service. This also means recurring revenue.

There's also a secular trend here in the United States, one that will unquestionably resume when the recession ends, and that is that Americans love to eat out. According to some estimates, we spend almost half of our food money eating outside the home.

Financially, Middleby is on solid ground. The company experienced a +9.3% sales increase in the second quarter, and a +12% rise in earnings. Free cash flow has been increasing over the years — from $56 million in 2007 to $95 million in 2009.

Action to Take –> Buy Middleby. Analyst's foresee +20% compound annual earnings growth during the next five years. If the stock price follows suit, as one would expect, that would suggest a +150% return. Backing off to a more conservative view of +15% earnings growth, you're looking at a solid double for a company with an entire planet to conquer and the resources to make it happen.

– Melvin Halcomb

Disclosure: Neither Melvin Halcomb nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: Melvin Halcomb
A Possible +100% Return From a Company That's Right Under Your Nose

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A Possible +100% Return From a Company That’s Right Under Your Nose

Commodities, Uncategorized

7 Key Questions About Gold

September 24th, 2010

7 Key Questions About Gold

Gold is on the march. The yellow metal is spiking to a new all time (non inflation-adjusted) highs of nearly $1,300 per ounce on renewed speculation that the Federal Reserve's next moves will only strengthen the case for higher gold prices down the road.

Let's take a closer look at some key questions to see if gold is set to shine even brighter or eventually lose its luster.

Q: What is the Fed concerned about?
A: In its most recent statement after Federal Reserve Open Market Committee (FOMC) meetings, the Fed noted that potential deflation is of increasing concern. (Core annual inflation has been running at 0.9% for five months in a row, its lowest pace since 1966.) Any drop in prices could spell real trouble for the economy and would imperil borrowers that are seeing lower income but constant debt levels.

Q: What might the Fed do?
A: To help support prices, the Fed can inject money into the economy by buying back bonds. (The bondholders that sell their debt back to the government would presumably put that cash to use elsewhere in the economy.)

Q: Why should that impact gold?
A: Many fear that the Fed is simply inviting the prospect of troubles down the road. Early in the last decade, the Fed also sought to boost the economy's prospects by keeping interest rates low. That set the stage for rampant low-cost borrowing and an eventual housing boom, which turned out to be disastrous for the economy when the music stopped.

This time around, the concern instead focuses on what might happen if the economy hums back to life but the Fed has a hard time keeping growth (and inflation) from surging. In the recent economic bubble, inflation never emerged. Yet gold bulls insist that we won't be so lucky next time. That's because budget deficits are now far higher, and if the United States can't meet its obligations, then inflation will rise as the Fed raises interest rates to keep attracting buyers for its debt. That would cause the dollar to weaken and gold would provide shelter in the storm. (But if rising inflation fails to materialize, then many that had bought gold on inflation fears may look to sell their positions.)

In addition, gold isn't as closely tied to economic cycles as are many commodities and equities, and it is frequently bought to diversify portfolios and guard against losses elsewhere. Conversely, as economies improve and stock markets rise, the argument for owning gold weakens. The fact that gold is hitting new highs even as the S&P 500 has had a strong two-week run is fairly unusual.

Q: What's the upside for gold?
A: Ah, the crystal ball question. Bulls think it can move toward the $2,000 per ounce. mark, which is actually the all-time high when adjusted for inflation. [Read: The Truth About Gold]

Why that price? There seems to be no real way to peg an actual projected value on gold. The price is driven by sentiment and not any sort of underlying asset value. We can figure out global demand for gold, and also how much is being produced each year. But we don't have a clear read of how much actual gold is sitting in central banks and especially in safe deposit boxes. Contrary to popular belief, central banks tend to offer contradictory statements on their gold holdings to keep currency speculators from knowing the state of their finances.

Gold producers generally spend around $450 per ounce to produce gold ($900 on a fully-expensed basis), so with gold above $1,000, there is ample incentive to hike output. And rising output of anything tends to have a dampening effect on prices. It hasn't happened yet, but some suspect we may be reaching the point of a gold glut — at least in terms of industrial and jewelry demand. Financial hedging demand is fairly immune to supply, and could continue to power gold higher. Gold contracts that expire in 2016 place a $1,447 price on an ounce of gold.

Rising prices have a way of feeding on themselves. JP Morgan's asset management arm continues to load up on gold on expectations that it will attract even more interest in coming years. (This is also known as the Greater Fool theory or the Keynesian beauty contest.)

Q: What's the downside?
A: The short answer is that gold could fall below $500 if all of these concerns fail to materialize. That's where gold traded back in 2005. And that's likely the area where supply and demand are truly affected, financial hedging considerations notwithstanding. As long as massive budget deficits remain as a concern, however, gold is very unlikely to fall back to that level.

Q: If I think gold has more to climb, should I buy gold or gold stocks?
A: The benefit of buying gold (or a gold ETF like the SPDR Gold Shares (NYSE: GLD)) is that you aren't paying for the operating expenses of gold companies and you are eliminating company-specific risk. And since gold producers may seek to lock in (or hedge) the price at which they can sell gold, they may not be able to fully profit from the sharp upward move in gold prices. (Currently, most gold producers are unhedged and willing to accept market risk, but that may change if prices rise higher.)

Then again, profits at gold-mining firms can grow even faster than the underlying commodity's price if they didn't lock in prices. That's due to the fixed-cost nature of gold mining. As noted earlier, it costs roughly $450 per ounce to mine, store and transport gold. So with gold selling at $1,000 an ounce, that's a $550 gross profit. But if gold prices rose +50% to $1,500, then per ounce gross profits would nearly double to $1,050. (Actual profits are well lower when non-mining costs are included.)

During the past 25 years, gold stocks have historically traded for between 12 and 24 times projected profits. Now they trade for just 11 times next year's profits. But that's because profits have risen so sharply and could well re-trench. If gold stayed above $1,200 per ounce for a number of years to come, then these stocks would look appealing. But if gold fell below $1,000 per ounce, then these companies' P/E ratios would appear astronomically high.

Investors can also look at where the gold miners trade in relation to their net asset value (NAV). They have historically traded between 1.4 times and 2.4 times NAV (except in early 2009 when they traded below NAV) and currently trade at 1.8. That NAV would rise and fall in step with any move in gold prices.

Q: What about “peak gold?”
A: While the question of peak oil dominates energy markets, it's really not important in gold mining. Most publicly-traded gold producers estimate that they have proven reserves that are equivalent to 10 to 20 years of annual production (and a similar amount that they have yet to verify as recoverable). And unlike oil that disappears when it is used, actual industrial demand for gold is so small relative to the amount held in bank vaults and jewelry chests, that any shortage could be met fairly easily.

Yet it is getting more expensive to mine gold as the easiest plays have been mined out and new mines are in increasingly remote or hard-to-mine locations. In 2000, it cost roughly $175 to mine and transport an ounce of gold. That figure moved above $250 in 2006, above $400 in 2008, and appears headed toward the $500 mark in the next year or so. Despite that rise, gross profit margins have surged. Gold miners made roughly $50 for every mined ounce from 1990 through 2005. Per ounce profits are up nine-fold since then.

But as noted above, miners have plenty of overhead costs, and it actually costs more than $900 to produce an ounce of gold when they are accounted for. That's why gold miners would hate to see a sharp pullback below $1,000 an ounce.

Action to Take –> All of this highlights a real conundrum for investors. Gold prices are being supported by economic concerns that have yet to (and may never) materialize. Gold can easily power higher (and technicians note that it just passed an important resistance level). But on a fundamental basis, gold appears quite overvalued. If gold prices fell to a point that truly reflects the fundamentals, then gold miners would see profits evaporate. Gold makes sense as a defensive hedge and as a means of diversification. But it's not a clear value as a pure investment.


– David Sterman

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
7 Key Questions About Gold

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7 Key Questions About Gold

Commodities, ETF, Uncategorized

12 States in Financial Distress

September 24th, 2010

12 States in Financial Distress

Even as the national economy manages to stay above water, the local picture is more complex. A number of states are starting to bounce back while other local economies remain under duress. Compared to a year ago, the employment picture has gotten even worse in 26 states, while conditions have stayed the same or improved in the other states. For many distressed states and cities, conditions may soon improve, while in other areas, conditions may worsen yet further.

To get a sense of the relative levels of distress, we can look at recently-released state unemployment rates.

State August 2009 unemployment rate Year-to-Year Change
Nevada 14.3% +1.8%
Michigan 13.1% -1.2%
California 12.4% +0.4%
Rhode Island 11.8% +0.1%
Florida 11.7% +0.7%
South Carolina 11.0% -1.1%
Oregon 10.6% -0.6%
Indiana 10.2% -0.1%
Illinois 10.1% -0.5%
Ohio 10.1% -0.6%
Georgia 10.0% +0.0%
Mississippi 10.0% +0.2%
Source: Labor Department

These 12 states have double-digit unemployment rates, and only Michigan and South Carolina have made any real progress. Michigan has been very aggressive in attracting new industries such as advanced batteries, and is also benefiting from a modest rebound in auto production. Many of those new jobs have not yet come online as factories are only being built, but Michigan could benefit from a virtuous cycle where each new job creates ancillary employment in businesses that service employees of those new factories.

Four out of 10 states with the highest unemployment rates reside in our nation's Rust Belt (Michigan, Indiana, Illinois and Ohio). And the only real panacea for these states is a rebound in the industrial sector. Yet that's not likely to take place unless the United States can materially boost exports. And much of that is dependent on a weaker dollar, which would also boost domestic consumption as imports become relatively more expensive.

Yet in places like Nevada and Florida, no clear panacea exists. Nevada's building boom was so extensive that it will take a very long time for economic activity to rebound. Las Vegas, the heart of the Nevada economy, will never again see the day when it only had to worry about Atlantic City for a gambler's dollars. Casinos have been built in so many states that the industry is over-saturated. [See: The Hot Stock in the New Mecca of Gambling]

California's 12.4% unemployment is especially vexing, as that state's economy is as large as that of many European countries. The cost of doing business in California remains quite high, so companies looking to build a new factory or headquarters are likely to look elsewhere.

Crippling debt
States' ability to rebound is also tied to their fiscal picture. States running large budget deficits face no choice but to lay off many public employees, especially as support from Washington will wind down next year. And in state capitals where public sector employment dominates the landscape, many other businesses will need to pare payroll as they'll have fewer customers.

The Center on Budget and Policy Priorities (CBPP) notes that states ran a cumulative deficit of $129 billion in fiscal (June) 2010, and that figure is expected to rise to $144 billion in the fiscal year that began July 1st. Fiscal 2010 deficits would have totaled $192 billion were it not for the federal support. December 31st looms large for many states. That's when federal funds that have been earmarked for state-level Medicaid support will end. Some expect Washington to provide an extension in support of Medicaid, but that's no sure thing. And continued federal support for local state budgets looks even less likely beyond the current fiscal year.

States are hoping that an economic rebound will boost tax receipts, but the shortfalls are so large that further belt-tightening will be impossible to avoid. And as the CBPP notes, “budget cuts often are more severe later in a state fiscal crisis, after largely depleted reserves are no longer an option for closing deficits.”

On average, a typical state currently has a 17% budget gap for fiscal 2011 that will need to be closed. A few states have budgets that are in balance, but many states have alarmingly high budget gaps. This table looks at the relative budget deficits of states with the highest unemployment rates. (If Washington does pass another stimulus program, then these shortfalls would be reduced.)

State August 2009 unemployment rate Projected Fiscal '11 Deficit as % of Budget
Nevada 14.3% -54.0%
Michigan 13.1% -9.2%
California 12.4% -21.6%
Rhode Island 11.8% -13.9%
Florida 11.7% -20.2%
South Carolina 11.0% -25.6%
Oregon 10.6% -17.6%
Indiana 10.2% -9.4%
Illinois 10.1% -41.5%
Ohio 10.1% -11.3%
Georgia 10.0% -26.2%
Mississippi 10.0% -16.1%
Source: Labor Department

It's worth noting that three of the Rust Belt states have already enacted very tough budgets and will need to tighten their belts much further. But in many states, further cuts in public employment appear inevitable.

Implications
How and when individual states can get back on their feet is highly dependent on regional factors. Florida's slump is largely due to a massive housing collapse. Yet Florida real estate prices have fallen so far that as the economy rebounds elsewhere, baby boomers may again be emboldened to buy a home in the sunshine state. That would provide a badly-needed boost to the state government's coffers. Southern states such as Georgia, Mississippi and South Carolina still have fairly low costs of living, which is why many European and Asian companies choose this region when looking to build new U.S. factories.

Other states will be forced to adapt to a changing world in order to lure businesses. New York State, which has among the highest taxes in the country, is nevertheless making real headway in attracting new clean energy and semiconductor businesses (most notably in the Albany, NY area and NY's Hudson Valley).

But there is no quick fix. And things will get worse before they get better. The real hope is that private sector employment can expand at a faster pace than public sector employment shrinks. And that's no sure thing. State employment data are released around the 20th of every month. Keep any eye on these figures during the next few months. Any worsening of the data could portend a major crisis in some of these states, requiring an emergency intervention from Washington, as California needed in 2009.


– David Sterman

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
12 States in Financial Distress

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12 States in Financial Distress

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China’s Rise Curbs US Influence in Australia

September 24th, 2010

Michael Pascoe, writing for Australia’s The Age, argues the US has nowhere near the potent influence on China many assume, despite that idea’s widespread belief. He tackles in particular the unassailable concept of the US consumer, suggesting this group not only fails to support practically all of China’s expansion, as is so often implied by the media, but is in fact only responsible for a measly-sounding 0.3 percent of China’s often double-digit GDP growth.

From The Age:

“Spare me the usual myopic line born of American xenophobia and ignorance about China being dependent on exports to the USA [...] net exports’ contribution to China’s growth over the past decade has averaged just 1.5 per cent. And the United States’ share of China’s exports is 20 per cent so the much ballyhooed American consumer is only good for 0.3 per cent of China’s GDP growth – growth that runs along in double digits or close to it even in the Great Recession.

“That’s only part of it. The stuff China exports to the US is mainly low value-added – clothing, toys, electronic gadgets. About half of China’s exports now go to the developing world and that half has higher value-added content – power stations, mining machinery and the like.” (Emphasis added.)

To add additional heft to his views, Pascoe often turns to previous comments from strategist Michael Power of Investec Asset Management…

“An example of [Michael Power's] examples: if you’ve been half tuned-in to the state of the world, you’d know that more cars are sold in China now than the US. That’s already history. The insight that’s worth thinking about is that car ownership penetration in China is only 3 per cent, 80 per cent of buyers are purchasing their first-ever car and 90 per cent pay cash. Not only is it a massive market, it’s ungeared and untapped.” (Emphasis added.)

By “ungeared,” Power means unleveraged, and is referring to the fact that the Chinese still do not have widely-available credit. Therefore, the typical shopper has precious few financing options available, aside from tapping personal savings, when looking to buy higher-priced durable goods, like cars. When China’s typical wage earner gains access to debt as a form of purchasing power there’s likely to be marked rise in the strength of its domestic consumer base.

Pascoe goes on to again briefly cite Power in describing what these changes have come to mean for Australia:

“‘…A decade or so ago, we spent a lot of time puzzling over why quarterly movements in Australian GDP were so highly correlated with quarterly movements in US GDP. We don’t puzzle over this anymore – not because we solved the puzzle, but because the correlation has fallen. At the same time, the correlation between quarterly movements in Australian and Chinese GDP has steadily increased. Clearly what happens in the Australian economy is now more dependent upon what happens in China than has been the case at any time in our past.’

“Emerging Asia is our economy now and will continue to be [...] But on top of the changing relative importance of the US to us is the declining absolute importance of the US. (This is me postulating now, echoing some of Power, not the more circumspect RBA.) Wall Street still calls the sentiment tune, but with the threat of more quantitative easing (ie printing money), the US is undermining its claim to the baseline of global capitalism – the “risk free” US government bond. It’s not risk free when its value is being eroded. The idea of the greenback being the safe haven currency is simply bemusing, it’s so last century.” (Emphasis added.)

The cat’s out of the bag… the US is failing not only as the engine of the entire world economy, but is even sputtering out relative to an English-speaking brethren that previously took its main cues from American financial markets. Specifically, Australia is picking up on the not-so-subtle hints from the Fed that it has little interest in a strong dollar or, for that matter, the feds any interest in a manageable national debt. The notion gaining steam is the American century is becoming an old story… one that’s already been written.

You can visit The Age to read more details in its coverage of how you ain’t seen nuthin’ yet from Chindia.

Best,

Rocky Vega,
The Daily Reckoning

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

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China’s Rise Curbs US Influence in Australia




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, OPTIONS, Uncategorized

Undervalued Silver in a Government Spending Frenzy

September 23rd, 2010

To prove that all my yelling, “Buy silver now, or you’re a moron!” has paid off, silver is getting a lot more press coverage lately, like the headline “Silver Hits ’80 Level; Gold Sets Fresh High,” which appeared on the front page of The Wall Street Journal’s “Money and Investing” section.

The reason that gold at $1,271 was hitting new record-highs, but not silver, is that silver, at $20.74 per ounce, is only at the highest price since October 1980, which is almost exactly 30 years ago.

Suddenly, I feel myself wanting to launch into some hyperventilating, rabid recommendation to buy silver, waxing overly-enthusiastic about silver as some “bargain investment of the century” because of any of a dozen reasons right off the top of my head, and probably many, many more if I were smart enough to understand their significance, which I can only barely sense, even though people are screaming at me, “What is it that you don’t understand, you moron? We’re been over this a dozen times!”

All I know for sure is that silver is actually not anywhere near its record high, as it now sells for a piddly $20.74 per ounce, less than half as high as silver’s all-time record price of $48.70 per ounce, which occurred in January 1980 during the infamous episode where the Hunt brothers tried, and almost succeeded, to corner the silver market, which brought out the slimy and infamous insider and government response to counter their ploy and crush the Hunt brothers.

This is not, however, a discussion about how the government is a far greater bunch of scumbags than the Hunt brothers at their worst, and don’t get me started on the slimy goings-on in the commodity exchanges, or how the Hunts were destroyed because, I assume, out of envy that they were so rich and so megalomaniacal that they enjoyed shameless orgiastic bacchanalia and other disgraceful perversions of the kind and expense that the government workers have to content themselves to, nowadays, merely view on their computers all day.

Of course, critical people want to know why I even bring up the topic of pornography in the first place, and why dog-eared copies of “Leggy, Lusty and Luscious” magazines are all over my office, when none of it has any relevance to anything, other than my idly musing that if I were rich enough to try and corner the silver market, I know what I would do, you know what I mean?

And anyway, there are enough accumulated news reports of government workers being caught-out watching porn while at work to indicate that the practice is pandemic, which doesn’t explain how the average government worker makes twice as much in wages and benefits as the average private-sector worker, nor does it explain how I can get one of those terrific government jobs making a lot of money to watch dirty movies all day, which are not (in case you were wondering) listed on any job listings I’ve seen, although, believe me, I looked!

But they do make this kind of money, and since the odious Supreme Court said that they could unionize so as to channel gobs of election-money to the very politicians who authorize their salary and benefit packages, I assume it will continue as part of Obama’s deficit-spending massive, massive, humongous amounts of money to maintain ALL government spending. And more, to offset the inflation caused by the previous deficit-spending!

Oddly enough, as sadly suicidal as this is to the country, it should make you, a Junior Mogambo Ranger (JMR), giddy with delight, as all this new money means that inflation in prices will soar, which is the stuff of euphoria for those buying gold, silver and oil stocks today at such bargain levels, so that we will attain the state of Nirvana known as “Rich, Rich, Rich (RRR)” when their prices soar as the Federal Reserve continues to destroy the buying power of the dollar!

And with the government and the Federal Reserve working overtime to make it happen just like that, what can you say but, “Whee! This investing stuff is easy!”?

The Mogambo Guru
for The Daily Reckoning

Undervalued Silver in a Government Spending Frenzy 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:
Undervalued Silver in a Government Spending Frenzy




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

Undervalued Silver in a Government Spending Frenzy

September 23rd, 2010

To prove that all my yelling, “Buy silver now, or you’re a moron!” has paid off, silver is getting a lot more press coverage lately, like the headline “Silver Hits ’80 Level; Gold Sets Fresh High,” which appeared on the front page of The Wall Street Journal’s “Money and Investing” section.

The reason that gold at $1,271 was hitting new record-highs, but not silver, is that silver, at $20.74 per ounce, is only at the highest price since October 1980, which is almost exactly 30 years ago.

Suddenly, I feel myself wanting to launch into some hyperventilating, rabid recommendation to buy silver, waxing overly-enthusiastic about silver as some “bargain investment of the century” because of any of a dozen reasons right off the top of my head, and probably many, many more if I were smart enough to understand their significance, which I can only barely sense, even though people are screaming at me, “What is it that you don’t understand, you moron? We’re been over this a dozen times!”

All I know for sure is that silver is actually not anywhere near its record high, as it now sells for a piddly $20.74 per ounce, less than half as high as silver’s all-time record price of $48.70 per ounce, which occurred in January 1980 during the infamous episode where the Hunt brothers tried, and almost succeeded, to corner the silver market, which brought out the slimy and infamous insider and government response to counter their ploy and crush the Hunt brothers.

This is not, however, a discussion about how the government is a far greater bunch of scumbags than the Hunt brothers at their worst, and don’t get me started on the slimy goings-on in the commodity exchanges, or how the Hunts were destroyed because, I assume, out of envy that they were so rich and so megalomaniacal that they enjoyed shameless orgiastic bacchanalia and other disgraceful perversions of the kind and expense that the government workers have to content themselves to, nowadays, merely view on their computers all day.

Of course, critical people want to know why I even bring up the topic of pornography in the first place, and why dog-eared copies of “Leggy, Lusty and Luscious” magazines are all over my office, when none of it has any relevance to anything, other than my idly musing that if I were rich enough to try and corner the silver market, I know what I would do, you know what I mean?

And anyway, there are enough accumulated news reports of government workers being caught-out watching porn while at work to indicate that the practice is pandemic, which doesn’t explain how the average government worker makes twice as much in wages and benefits as the average private-sector worker, nor does it explain how I can get one of those terrific government jobs making a lot of money to watch dirty movies all day, which are not (in case you were wondering) listed on any job listings I’ve seen, although, believe me, I looked!

But they do make this kind of money, and since the odious Supreme Court said that they could unionize so as to channel gobs of election-money to the very politicians who authorize their salary and benefit packages, I assume it will continue as part of Obama’s deficit-spending massive, massive, humongous amounts of money to maintain ALL government spending. And more, to offset the inflation caused by the previous deficit-spending!

Oddly enough, as sadly suicidal as this is to the country, it should make you, a Junior Mogambo Ranger (JMR), giddy with delight, as all this new money means that inflation in prices will soar, which is the stuff of euphoria for those buying gold, silver and oil stocks today at such bargain levels, so that we will attain the state of Nirvana known as “Rich, Rich, Rich (RRR)” when their prices soar as the Federal Reserve continues to destroy the buying power of the dollar!

And with the government and the Federal Reserve working overtime to make it happen just like that, what can you say but, “Whee! This investing stuff is easy!”?

The Mogambo Guru
for The Daily Reckoning

Undervalued Silver in a Government Spending Frenzy 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:
Undervalued Silver in a Government Spending Frenzy




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

Buy the Emerging Markets, Part II

September 23rd, 2010

What’s wrong with this picture?

US vs. Brazil Annual Government Budgets

This chart shows the comparative fiscal trends of the US and Brazil during the last decade. Back in 1999, the US was running a budget surplus and Brazil was running a deficit equal to about 9% of its GDP. Over the ensuing 11 years, those conditions flip-flopped. Brazil is now running a very slight deficit and the US is running a very large one.

Brazil is representative of many Emerging Markets. If we broaden out our analysis, what we find is not just a relative improvement in government finances, but also a dramatic improvement in the private sector. Half of global GDP is now produced by what we call the Emerging Markets. Looking farther out, the IMF expects the Emerging Markets to produce more than 60% of the world’s GDP growth over the next four years – or about five times the growth the G-7 countries will contribute. The IMF is not omniscient. It has been known to make a mistake from time to time. But its forecast is probably close to the target in this case.

BRIC GDP Growth vs. G-7 GDP Growth

And yet, despite data like these, many investors – both professional and individual – carry massively “overweight” positions in US stocks. They just can’t seem to break that bad habit.

Why? Because US stocks are familiar! They are IBM and GE and McDonald’s.

The argument in favor of Emerging Markets is easy to embrace clinically, but not easy to implement emotionally. US stocks simply feel safer than Emerging Market stocks. In response to such anxieties, William Shakespeare’s Measure for Measure provides an insightful counterpoint: “Our doubts are traitors, and make us lose the good we oft might win, by fearing to attempt.”

The time has come to cast aside our fears and to embrace the world as it actually is, not as we might like it to be. In the world as it actually is, for example, Emerging Market stocks are performing much better than Developed World stocks – both in absolute terms and in so-called “risk-adjusted” terms. Emerging Market stocks aren’t just producing higher returns, they are producing these returns with very modest amounts of volatility.

Over the last decade, for example, the MSCI Emerging Markets Index has tripled, while the S&P 500 Index has produced a loss…including dividends. More recently, if we compare these indices from the bear market lows of March 2009 to the present, we see that Emerging Market stocks are up more than 120%, compared to a gain of only 60% for the S&P 500. But despite producing double the return of the S&P during the last 18 months, the MSCI Emerging Markets Index was only slightly more volatile than the S&P 500.

More intriguing is the comparison between Emerging Market stocks and the traditionally risky sectors of the US stock market – things like homebuilders and bank stocks. It used to be that these risky assets would all trade very closely with one another. Emerging Markets were considered risky, just like homebuilders and bank stocks. So they all went up and down together…especially down.

That’s not happening anymore. The risky stuff in the US is still plenty risky…and doing poorly. But the “risky” Emerging Markets are doing very well. This divergence has become particularly acute over the last four months. Since the first week of May, the MSCI Emerging Markets Index has advanced 10%. But over the same timeframe, the ISE Homebuilders Index is down 15% and the KBW Bank Index is down 20%.

Net-net, it has become more important now than perhaps at any other time during the last 30 years to ask, “What am I getting for the risk I am taking?”

For the last 10 years, the US stock market has delivered lots and lots of bumps, lots and lots of volatility, and absolutely zero return. That’s not good. There is no way of knowing, of course, whether this recent past will also be prologue. But there is a way to guess…intelligently. Simply stated, the economies of many, many Emerging Markets are performing much better than their counterparts in the Developed World. And this trend seems very likely to continue for many years.

And yet, Emerging Market valuations remain below those of the Developed World. At the current quote, the MSCI Emerging Market Index sells for about 13 times earnings, while the MSCI EAFE Index (non-US Developed World stocks) sells for 16 times earnings. For additional perspective, the NASDAQ Composite Index currently trades for a hefty 25 times earnings. Thirteen times earnings is not what one could call “dirt cheap,” but it is certainly “cheaper than” the EAFE Index or the NASDAQ Composite.

There are many ways to capitalize on the future relative strength of the Emerging Market economies: Foreign stocks and/or real estate are a couple obvious examples. That said, please invest very selectively. Do not invest in Emerging Markets – or in any market – because you feel like you have to, or because you have some vague idea that you ought to. Invest in the Emerging Markets only when – and if – you recognize a very specific opportunity that is worth taking a very specific risk.

Thank you.

Eric J. Fry
for The Daily Reckoning

Buy the Emerging Markets, Part II 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:
Buy the Emerging Markets, Part II




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

Real Estate, Uncategorized

Buy the Emerging Markets, Part II

September 23rd, 2010

What’s wrong with this picture?

US vs. Brazil Annual Government Budgets

This chart shows the comparative fiscal trends of the US and Brazil during the last decade. Back in 1999, the US was running a budget surplus and Brazil was running a deficit equal to about 9% of its GDP. Over the ensuing 11 years, those conditions flip-flopped. Brazil is now running a very slight deficit and the US is running a very large one.

Brazil is representative of many Emerging Markets. If we broaden out our analysis, what we find is not just a relative improvement in government finances, but also a dramatic improvement in the private sector. Half of global GDP is now produced by what we call the Emerging Markets. Looking farther out, the IMF expects the Emerging Markets to produce more than 60% of the world’s GDP growth over the next four years – or about five times the growth the G-7 countries will contribute. The IMF is not omniscient. It has been known to make a mistake from time to time. But its forecast is probably close to the target in this case.

BRIC GDP Growth vs. G-7 GDP Growth

And yet, despite data like these, many investors – both professional and individual – carry massively “overweight” positions in US stocks. They just can’t seem to break that bad habit.

Why? Because US stocks are familiar! They are IBM and GE and McDonald’s.

The argument in favor of Emerging Markets is easy to embrace clinically, but not easy to implement emotionally. US stocks simply feel safer than Emerging Market stocks. In response to such anxieties, William Shakespeare’s Measure for Measure provides an insightful counterpoint: “Our doubts are traitors, and make us lose the good we oft might win, by fearing to attempt.”

The time has come to cast aside our fears and to embrace the world as it actually is, not as we might like it to be. In the world as it actually is, for example, Emerging Market stocks are performing much better than Developed World stocks – both in absolute terms and in so-called “risk-adjusted” terms. Emerging Market stocks aren’t just producing higher returns, they are producing these returns with very modest amounts of volatility.

Over the last decade, for example, the MSCI Emerging Markets Index has tripled, while the S&P 500 Index has produced a loss…including dividends. More recently, if we compare these indices from the bear market lows of March 2009 to the present, we see that Emerging Market stocks are up more than 120%, compared to a gain of only 60% for the S&P 500. But despite producing double the return of the S&P during the last 18 months, the MSCI Emerging Markets Index was only slightly more volatile than the S&P 500.

More intriguing is the comparison between Emerging Market stocks and the traditionally risky sectors of the US stock market – things like homebuilders and bank stocks. It used to be that these risky assets would all trade very closely with one another. Emerging Markets were considered risky, just like homebuilders and bank stocks. So they all went up and down together…especially down.

That’s not happening anymore. The risky stuff in the US is still plenty risky…and doing poorly. But the “risky” Emerging Markets are doing very well. This divergence has become particularly acute over the last four months. Since the first week of May, the MSCI Emerging Markets Index has advanced 10%. But over the same timeframe, the ISE Homebuilders Index is down 15% and the KBW Bank Index is down 20%.

Net-net, it has become more important now than perhaps at any other time during the last 30 years to ask, “What am I getting for the risk I am taking?”

For the last 10 years, the US stock market has delivered lots and lots of bumps, lots and lots of volatility, and absolutely zero return. That’s not good. There is no way of knowing, of course, whether this recent past will also be prologue. But there is a way to guess…intelligently. Simply stated, the economies of many, many Emerging Markets are performing much better than their counterparts in the Developed World. And this trend seems very likely to continue for many years.

And yet, Emerging Market valuations remain below those of the Developed World. At the current quote, the MSCI Emerging Market Index sells for about 13 times earnings, while the MSCI EAFE Index (non-US Developed World stocks) sells for 16 times earnings. For additional perspective, the NASDAQ Composite Index currently trades for a hefty 25 times earnings. Thirteen times earnings is not what one could call “dirt cheap,” but it is certainly “cheaper than” the EAFE Index or the NASDAQ Composite.

There are many ways to capitalize on the future relative strength of the Emerging Market economies: Foreign stocks and/or real estate are a couple obvious examples. That said, please invest very selectively. Do not invest in Emerging Markets – or in any market – because you feel like you have to, or because you have some vague idea that you ought to. Invest in the Emerging Markets only when – and if – you recognize a very specific opportunity that is worth taking a very specific risk.

Thank you.

Eric J. Fry
for The Daily Reckoning

Buy the Emerging Markets, Part II 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:
Buy the Emerging Markets, Part II




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

Real Estate, Uncategorized

The Illusion of Prosperity Driven by Debt

September 23rd, 2010

Michael Hirsh, author of Capital Offense: How Washington’s Wise Men Turned America’s Future Over to Wall Street, recently appeared on Morning Joe to talk about Wall Street’s pre-crisis, decades-long encroach upon Washington that would eventually end in financial crisis.

In his estimation, the gradual takeover was about 30 years in the making. It got underway when the ideals of free market revolution were sweeping mainstream economics and all common sense of boom and bust cycles — how markets are prone to wild swings of manias and panics – was abandoned to instead funnel increasing power to financial services in hopes of ever-greater returns and economic growth.

The outcome he describes is a “hollowing out of the middle class,” where Wall Street and Washington both played key roles in creating the “illusion of prosperity” while actually force-feeding the public with debt and artificially inflating asset prices. Until finally, the duped middle class — expected to sustain the US economy and even serve as “consumer of last resort for the whole world” — ended up broke.

This insightful clip came to our attention via a Naked Capitalism post covering Hirsh’s perspective on the roots of the financial crisis.

The Illusion of Prosperity Driven by Debt 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 Illusion of Prosperity Driven by Debt




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

Uncategorized

What’s to be Done with the Current Stock Market?

September 23rd, 2010

If you’ve been feeling skittish about buying stocks lately, you’re hardly alone. A poll of investors commissioned by the Associated Press and CNBC finds…

  • 61% are less confident about buying and selling individual stocks, owing to recent market volatility
  • 55% believe the market is fair only to some investors.

Over the last two-and-a-half years, investors have pulled a net $244 billion out of stock mutual funds, adds the Investment Company Institute. Meanwhile, they’ve poured $589 billion into bond funds during the same period.

My how times change. Ten years ago – just as we were recommending gold as an alternative – the mantras among middle-class investors were “invest for the long run” and “stocks always go up.” The following chart, helpfully assembled by economist David Rosenberg, shows how daft that idea was, indeed:

10-Year Returns Based on Asset Class

Yep, you could have parked your money in 90-day Treasuries and rolled them over continuously…and you’d have made nearly as much money as you’d have lost buying an S&P 500 index fund.

One single investment decision in 1999 – to put your money in gold – would have paid 10 times that return. Of course, gold was the province of cranks and kooks back then…so very few people made that choice.

Even corporate insiders are headed for stock floor exits these days. Last week, as the S&P posted a nice 2% gain, corporate officers and directors bought $1.4 million in shares of their companies. A tidy little sum…

But they sold $411 million – a ratio of $291 of stock sold for every $1 purchased. But hey, it’s an improvement over the week before, when the ratio was 652-1.

With data like this, we’re struck by how equally irrational a bust can be…

“Odds are if your neighbor knows anything at all about the stock he just bought beyond its ticker symbol,” says Mayer’s Special Situations’ Chris Mayer, “it is probably the price-to-earnings (P/E) ratio.

“The P/E ratio is the most well-known (but not best) measure of how cheap or dear a stock may be. The market overall, too, has a P/E that rises or falls dramatically. It has fallen 35% in the last 12 months. Earnings surged in the second quarter, but the stock market was lower.

“I say get used to it.”

Chris recently reread Humble on Wall Street, the 1975 memoir of investor Martin Sosnoff. Like many in those era, Sosnoff got burned by the bear market that set in after the Dow hit 1,000 in 1966.

“It is worth saying,” Sosnoff wrote, “how difficult it was for any professional investor in 1965 to conceive of the Dow Jones industrial average heading toward 7 times [earnings] when it was then at 17 times.

A handful of people did, like A.T. Mahan, who toiled in a now-defunct brokerage called Delafield and Delafield. He saw prices advancing more slowly than profits – and the inevitable compression of P/Es that would follow. “We are currently in an early phase of an ebb tide,” he wrote in late 1965.

“We are in a Mahan-like market,” Chris concludes. “We are on the ebb tide. Stocks will rise more slowly than earnings as P/Es compress.”

“But don’t let that discourage you,” Chris urges, always the optimist in the bunch. “‘For the enterprising investor, this should be a challenge, rather than a cause of discouragement,’ Mahan wrote. ‘In good times, almost anyone can make a profit. But the years ahead should separate the men from the boys by placing a high premium on stock selection.’”

In other words, “It’s a good time for stock pickers,” says Chris. A basket of carefully chosen stocks is about your only choice right now if you don’t want to flee to strictly gold and/or cash.

Addison Wiggin
for The Daily Reckoning

What’s to be Done with the Current Stock Market? originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
What’s to be Done with the Current Stock Market?




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.

Mutual Fund, Uncategorized

The Problem with “Policy Measures” and “Quantitative Easing”

September 23rd, 2010

The Federal Open Market Committee (FOMC) is worried. Very worried. It is worried that it is not destroying the dollar fast enough.

“Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability,” the FOMC declared Tuesday. “Inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.” In other words, as every Ivy-League-educated economist understands very well, the Fed must nourish inflation if it is to have any hope of reviving the economy.

Possessing merely a bachelor’s degree from UCLA, your California editor naively maintains his low-brow economic ideas. He still suspects – poor, brutish lad – that debasing the currency is an ill-advised means toward a dubious end. Rather than debasing the dollar to repel the natural forces of creative destruction, as Chairman Bernanke and his colleagues advocate, your editor suspects that the best means toward sustainable economic growth is to allow failing enterprises to fail, so that stronger enterprises may take their place. (And leave the poor greenback alone, please).

But the Ivy League intelligentsia sees it differently. The intelligentsia embraces an agenda of mere expedience, dressed in the eloquent vernacular of financial euphemisms. To wit: “Money-printing” is now “quantitative easing,” while “throwing spaghetti against the wall and seeing what sticks” is now a “policy measure.”

Harvard grad, Ben Bernanke, insists that the Federal Reserve’s most important near-term mission is to combat deflationary pressures by any and all “policy measures” available. The mission, in other words, is to produce inflation. (We’re not making this up). In the FOMC’s own words, “The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

Your California editor is from Missouri on this one. The US economy does not need more inflation; it needs less intervention, coddling and do-gooding by central bankers and legislators. The US economy needs to suffer whatever wounds it must suffer, so that it may heal and resume growing. There is no shortcut…and there will be no shortcut, no matter how many Treasury bonds the Fed buys, nor how many FOMC meetings it convenes.

And by the looks of things, the US economy still has a bit of suffering left to do. Housing prices and sales volumes continue to fall, foreclosures continue to soar, unemployment refuses to drop and business spending refuses to rise. Instead, we Americans are, collectively, retreating into our foxholes and trying to fortify our personal finances. We are saving more and borrowing less. But at the same time, our government is going on an unprecedented borrowing and spending binge…which makes all of us poorer, no matter what we do.

These conditions – private sector caution, household frugality and government profligacy – rarely produce national prosperity. Instead, some form of stagnation usually results. We should not be surprised, therefore, if the US economy continues to muddle along for a while…and maybe for a long while.

Eric Fry
for The Daily Reckoning

The Problem with “Policy Measures” and “Quantitative Easing” 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 Problem with “Policy Measures” and “Quantitative Easing”




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

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