How to Make Real Money in Real Estate and Other Investments

October 1st, 2010

Dow…3 ounces!

Our old friend Ronan McMahon has been keeping us up to date. Ireland is going broke, he says.

The Irish foolishly borrowed too much money during the boom years. The banks foolishly lent too much money. And then the government foolishly said it would bail them out…even though the total exposure was four times Irish GDP. Yesterday, they foolishly took over Ireland’s biggest bank, Anglo Irish. And now they’re going broke. The losses are probably more than they can handle.

But it’s been worth it. What a ride the Irish have had! They were the poorest people in Western Europe…then, they became the richest people in Western Europe. And now they’re back to being the poorest…

It would have been better if they had had a better sense of architecture during the fat years… They wouldn’t have blemished the island with so many ugly buildings. Alas, the Irish will have to live with the stain of their prosperous years for generations…

Of course, the same could be said for the USA. All those wretched suburbs and condos… All those shopping malls… All those parking lots…

Not to mention all that debt!

Yes, we will live with the bubble rubbish and residue for many years.

But Ronan said something interesting. We were discussing Irish property. There’s a lot of it for sale. Buyers can practically name their own prices. But the choice properties are still in the hands of the insiders. When they see something go down to where it is a bargain price…they snap it up.

This signals to us that the whole process of debt destruction still has a long way to go. The assets still have appeal. Investors still think they can make money by buying low and selling high. In other words, they still think there is a bias towards the upside.

They haven’t given up. They’re still eager to buy – at the right price.

But just wait. When the end comes…they won’t be interested at any price. Some of the finest properties will go “no bid.” Then, the players…the insiders…the smart money will all be convinced that property is a losing proposition…and that you will never make money by buying real estate – because it always goes down. Then, when the insiders have given up. Then, and only then, can you expect to make any real money.

It’s no different in the stock market. What investors want now are bargains. They think that they can make money, by buying at the right price. Then, as the “recovery” comes their stocks will go up. They think the bias of the stock market is still upwards.

Certain well-known investors – for whom we have an enormous lack of respect – claim that stock prices always go up “in the long run.” These super bulls are forever predicting “Dow 36,000” or “Dow 100,000.” And they’ll probably be right. Someday, the Dow will probably hit 100,000. And you’ll be able to read about it in your $50 newspaper while you’re drinking your $100 cup of coffee.

This week, Jeffrey Hirsch predicted a Dow over 38,000 by 2025 – a gain of about 5% per annum, without dividends. Maybe he’ll be right too.

But stocks don’t really always go up. Au contraire, every stock you buy will eventually go to zero. Your only hope is that you expire worthless before it does.

As for the lot of them, remember that most of their profits and share price growth is an illusion. Let’s say you “buy the market.” You just get an ETF representing the index…or simply buy the Dow stocks. The companies make money. Their share prices go up.

But wait. Where do their revenues come from? Where do their profits come from? Aren’t they just taking money from each other…and from other businesses and consumers (who are also their employees…that is, a cost center)? How can they ALL go up? They can’t really. They can only grow as fast as the economy itself. Competition keeps profit margins with a fairly narrow band. So, their share of the economy is limited. And since the economy is quoted in money…they can’t really go up more than money itself.

In other words, if there were just $100 in a town, and the businesses in the town were worth half that amount, they would be worth $50. Total. No matter how much progress the town made, as long as the amount of money stayed constant, they would still only be worth $50 (though that money could be worth much, much more in terms of what it would buy).

Gold is stable money. It’s the closest thing we have to a fixed monetary unit. The supply increases, but only about as fast as the rest of the economy increases. So, over thousands of years its “price” – in terms of how much you could exchange in for – has been more or less constant.

If stocks were really becoming more valuable you’d expect that they would become more valuable against a fixed quantity of real money – gold. But look at what has happened. At the beginning of the 20th century, the Dow was 66 and an ounce of gold was about $20. “A $20 gold piece” was a unit of exchange. So it took a bit more than 3 ounces of gold to buy the Dow. Then, at the bottom of the bear market in stocks in the ’30s, again it took about 3 ounces of gold to buy the Dow. And again, at the bottom of the bear market in ’82 you could buy the Dow for less than 3 ounces. At one point, a single ounce would do it.

Currently, it takes a bit more than 8 ounces to buy the Dow. Hmm… You could get the Dow for about 8 ounces of gold in the ’10s…again in the ’20s…the ’30s…the ’40s…the ’50s…’70s…’80s…and now finally, once again, in 2010.

And that number is probably going down. The bear market in stocks still hasn’t reached its bottom. When it does, you’ll almost certainly be able to buy the Dow for 3 ounces of gold.

Stocks for the long run? Ha ha….

Bill Bonner
for The Daily Reckoning

How to Make Real Money in Real Estate and Other Investments 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:
How to Make Real Money in Real Estate and Other Investments




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.

ETF, Real Estate, Uncategorized

How to Make Real Money in Real Estate and Other Investments

October 1st, 2010

Dow…3 ounces!

Our old friend Ronan McMahon has been keeping us up to date. Ireland is going broke, he says.

The Irish foolishly borrowed too much money during the boom years. The banks foolishly lent too much money. And then the government foolishly said it would bail them out…even though the total exposure was four times Irish GDP. Yesterday, they foolishly took over Ireland’s biggest bank, Anglo Irish. And now they’re going broke. The losses are probably more than they can handle.

But it’s been worth it. What a ride the Irish have had! They were the poorest people in Western Europe…then, they became the richest people in Western Europe. And now they’re back to being the poorest…

It would have been better if they had had a better sense of architecture during the fat years… They wouldn’t have blemished the island with so many ugly buildings. Alas, the Irish will have to live with the stain of their prosperous years for generations…

Of course, the same could be said for the USA. All those wretched suburbs and condos… All those shopping malls… All those parking lots…

Not to mention all that debt!

Yes, we will live with the bubble rubbish and residue for many years.

But Ronan said something interesting. We were discussing Irish property. There’s a lot of it for sale. Buyers can practically name their own prices. But the choice properties are still in the hands of the insiders. When they see something go down to where it is a bargain price…they snap it up.

This signals to us that the whole process of debt destruction still has a long way to go. The assets still have appeal. Investors still think they can make money by buying low and selling high. In other words, they still think there is a bias towards the upside.

They haven’t given up. They’re still eager to buy – at the right price.

But just wait. When the end comes…they won’t be interested at any price. Some of the finest properties will go “no bid.” Then, the players…the insiders…the smart money will all be convinced that property is a losing proposition…and that you will never make money by buying real estate – because it always goes down. Then, when the insiders have given up. Then, and only then, can you expect to make any real money.

It’s no different in the stock market. What investors want now are bargains. They think that they can make money, by buying at the right price. Then, as the “recovery” comes their stocks will go up. They think the bias of the stock market is still upwards.

Certain well-known investors – for whom we have an enormous lack of respect – claim that stock prices always go up “in the long run.” These super bulls are forever predicting “Dow 36,000” or “Dow 100,000.” And they’ll probably be right. Someday, the Dow will probably hit 100,000. And you’ll be able to read about it in your $50 newspaper while you’re drinking your $100 cup of coffee.

This week, Jeffrey Hirsch predicted a Dow over 38,000 by 2025 – a gain of about 5% per annum, without dividends. Maybe he’ll be right too.

But stocks don’t really always go up. Au contraire, every stock you buy will eventually go to zero. Your only hope is that you expire worthless before it does.

As for the lot of them, remember that most of their profits and share price growth is an illusion. Let’s say you “buy the market.” You just get an ETF representing the index…or simply buy the Dow stocks. The companies make money. Their share prices go up.

But wait. Where do their revenues come from? Where do their profits come from? Aren’t they just taking money from each other…and from other businesses and consumers (who are also their employees…that is, a cost center)? How can they ALL go up? They can’t really. They can only grow as fast as the economy itself. Competition keeps profit margins with a fairly narrow band. So, their share of the economy is limited. And since the economy is quoted in money…they can’t really go up more than money itself.

In other words, if there were just $100 in a town, and the businesses in the town were worth half that amount, they would be worth $50. Total. No matter how much progress the town made, as long as the amount of money stayed constant, they would still only be worth $50 (though that money could be worth much, much more in terms of what it would buy).

Gold is stable money. It’s the closest thing we have to a fixed monetary unit. The supply increases, but only about as fast as the rest of the economy increases. So, over thousands of years its “price” – in terms of how much you could exchange in for – has been more or less constant.

If stocks were really becoming more valuable you’d expect that they would become more valuable against a fixed quantity of real money – gold. But look at what has happened. At the beginning of the 20th century, the Dow was 66 and an ounce of gold was about $20. “A $20 gold piece” was a unit of exchange. So it took a bit more than 3 ounces of gold to buy the Dow. Then, at the bottom of the bear market in stocks in the ’30s, again it took about 3 ounces of gold to buy the Dow. And again, at the bottom of the bear market in ’82 you could buy the Dow for less than 3 ounces. At one point, a single ounce would do it.

Currently, it takes a bit more than 8 ounces to buy the Dow. Hmm… You could get the Dow for about 8 ounces of gold in the ’10s…again in the ’20s…the ’30s…the ’40s…the ’50s…’70s…’80s…and now finally, once again, in 2010.

And that number is probably going down. The bear market in stocks still hasn’t reached its bottom. When it does, you’ll almost certainly be able to buy the Dow for 3 ounces of gold.

Stocks for the long run? Ha ha….

Bill Bonner
for The Daily Reckoning

How to Make Real Money in Real Estate and Other Investments 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:
How to Make Real Money in Real Estate and Other Investments




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.

ETF, Real Estate, Uncategorized

Chinese Manufacturing Grows

October 1st, 2010

The data cupboard’s results ended up being a bit better than expected, not by leaps and bounds, but certainly not the bottom of the barrel!

The first revision of second quarter GDP was nudged upward to 1.7% from 1.6%… Personal Consumption was 2.2% versus 2% last month, the Weekly Initial Jobless Claims fell by 16,000, and the Chicago Manufacturing Index was 60.4 from 56.7, a very nice increase I must say!

But that didn’t stop the dollar selling… Well, maybe for about a 3 hour period yesterday, the dollar rallied, but that was soon put to bed, and the currency rally was back on…

And then overnight, the risk campers were spreading out all over the world, as China’s Manufacturing Index rose. The risk on trading is in full force this morning because of China’s report… So with no further adieu, here’s the skinny!

Overnight, China reported that their Purchasing Managers’ Index (PMI), which tracks manufacturing, just like the PMI here in the US, had gained in September, rising from 51.7 to 53.8… (remember any number above 50 equals expansion) And the risk taking took off!

And of course, any time there’s good economic data from China, the Aussie dollar (A$) gets bought like funnel cakes at a state fair! And that’s exactly what happened overnight!

I have to say that, with this data from China, that I’m going to think more about the Reserve Bank of Australia (RBA) raising interest rates at their meeting next week. Before the Chinese report, the call for a rate hike was about 50-50… But now, I would have to say that we’re 2/3rds on our way to another rate hike in Australia next week!

So… Add the increased prospects of a rate hike in Australia to the news that Chinese manufacturing increased in September, and mix them all up still nice and smooth, and you’ll have a rally in the A$!

But the Big mover and shaker overnight was the euro… Don’t look now, but the euro is trading with a 1.37 handle! And all those naysayers that just a few months ago, were crowing about a breakup of the Eurozone and a collapse of the euro, are no where to be found… In their place are now guys calling for strong moves higher in the euro… I know a guy that called for a multi-year strong dollar rally back in 2008, and then when that didn’t happen, he called for another one just 6 months ago… Now, I’m not here to ridicule any one, but COME ON! With all that’s going on with our unsustainable way of deficit spending here in the US it just seems to be a lay-up to think the dollar has a tough row to hoe for some time to come…

Someone asked me yesterday, why I didn’t refer to the euro as the Big Dog any longer, and should the A$ take the euro’s place as the Big Dog?  Hmmmm… Not unless the A$ takes over as the offset currency to the dollar. Yes, that title held by the euro, was in jeopardy 6 months ago, but no longer… And the Big Dog has returned to lead the pack of non-euro currencies versus the dollar! And now, I see a currency trading company said that the euro will reach 1.50 by the end of December! WOW! These are the same guys that said back in July that the euro would gain 6% in the next two months… So, I guess we should pay attention to what they have to say, eh?

The euro rally was boosted by the risk taking that was going on overnight, but what really got the euro going versus the dollar were some Fed Head speeches… Hold on to your hat here, because the Fed Heads were talking about inflation being too low, and the return of Quantitative Easing (QE). So… With the lead-in, the data cupboard will play a big part in today’s trading.

Remember when Big Al Greenspan had an axe to grind for the Personal Consumption data? Well, what he really watched was the Personal Consumption Expenditure (PCE) Deflator, which is an index that tracks the prices in PCE…  August’s PCE Deflator prints today, and is expected to be 1.5%… I would say that the Fed would react big time should the index print weaker than 1.5%… And any Fed reaction is bad for the dollar…

But then, maybe PCE was like Puff The Magic Dragon, and when Big Al Greenspan went away, the PCE dragon ceased his fearless roar. His head was bent in sorrow, green scales fell like rain, Puff no longer went to play along the cherry lane. Without his life-long friend, puff could not be brave, So puff that mighty dragon sadly slipped into his cave…

So… While we’re talking about US data (yes, we were back a paragraph before I got silly)… The Data Cupboard is overflowing with data today for us! Right out of the starters blocks this morning, we have two of my fave data prints, Personal Income and Spending. Then the PCE data, and a serving of U. of Michigan Consumer Confidence. Then to finish off our data meal, we’ll see Construction Spending, and Vehicle Sales…

So, lots to deal with today, but in the end, the dollar selling will remain in tact, and the dollar will close out the 3rd QTR with one of its worst performing quarters of all time!

Ok… At the top I mentioned the Fantastico Friday that precious metals were having… Gold is up $8 to $1,316 and Silver has maintained $22… A lot of people are wondering if it is worth it to buy Gold at this lofty level… All I can say is that there was another group that was worried about buying Gold at $1,000, and then another group that worried about buying Gold at $1,100, then $1,200…

You have to ask yourself this question… Do you think the dollar is going to continue to weaken for some time to come? (please remember that a trend is not a One-Way street, and we could have volatility (dollar strength) for short periods of time)

If you answered yes, then buying Gold should be considered as wealth protection, at any price… And if you’re on board with the dollar weakness, but still are balking at $1,300 Gold, then you should consider Silver… Hey! Silver is more than just an investment metal, it’s also an industrial metal, so the demand for Silver comes from two groups of buyers… Wink, wink…

And remember yesterday when I said… “and the Brazilian real looks like it could trade below 1.70 for the first time since last November!” Well, as I always say… I love it when a plan comes together! And so it was with Brazilian real, which took my call and ran with it all the way to 1.6866! WOW! Talk about a move!

Now… Here’s where the rubber meets the road folks, will the Brazilian Central Bank step in again, to stem the real’s rise, or have they spent their last Billion dollars doing so, or… Most likely, they’ve seen that intervention doesn’t work! But, if the Brazilian Central Bank does muster up the nerve to intervene again, we could see the real back off this lofty 1.68 handle…

And as the members of the House go back to campaign and attempt to salvage their political careers, they have in their back pocket a measure to place tariffs on Chinese imports… But, as they get in their chauffeured limos, they will probably hear that last night, Japan’s Prime Minister, Kan, told the press that he’s “prepared to resume selling the country’s currency to prevent it from strengthening.” He also called on the Bank of Japan to do more to fight deflation…

Yes, there right out in the open, the Japanese PM said he’s going to manipulate his currency weaker versus the dollar… And yet, our representatives are going after China…

Again… Nov. 2nd… Take the trash out! These guys are driving us over a cliff! We can see it, but they can’t!

And… Before I head to the Big Finish, I noticed this morning that the price of Oil is back to $80… The dollar is getting hit from 3 corners… Currencies, precious metals, and Oil…

Then there was this… Did you know that it only takes 38 states to convene a Constitutional Convention? I was in meetings with the my “other” job colleagues the other day, and I was explaining this Constitutional Convention to them… So far Governors of 35 states have filed suite against the Federal Gov’t. for imposing unlawful burdens on them.  Here’s what I would like to see… I would love for a Constitutional Convention to convene, and repeal 1913… Repeal the agencies… And a host of other things…

It is… We the People… Right? Then We the People should decide what bills, amendments, etc. we want…

Ok… Maybe that’s all wishful thinking…

To recap… Chinese manufacturing gained ground in September, and that brought even more risk takers out to play. The euro got a boost from the Chinese data, but also from the Fed Heads who all talked about how low inflation was, and the need to do something about it, which means more QE. And the A$ also saw buying after the Chinese data. The US data cupboard is overflowing with data today to end the month and quarter, that has seen the currencies & precious metals kick sand in the dollar’s face.

Chuck Butler
for The Daily Reckoning

Chinese Manufacturing Grows 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:
Chinese Manufacturing Grows




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

Chinese Manufacturing Grows

October 1st, 2010

The data cupboard’s results ended up being a bit better than expected, not by leaps and bounds, but certainly not the bottom of the barrel!

The first revision of second quarter GDP was nudged upward to 1.7% from 1.6%… Personal Consumption was 2.2% versus 2% last month, the Weekly Initial Jobless Claims fell by 16,000, and the Chicago Manufacturing Index was 60.4 from 56.7, a very nice increase I must say!

But that didn’t stop the dollar selling… Well, maybe for about a 3 hour period yesterday, the dollar rallied, but that was soon put to bed, and the currency rally was back on…

And then overnight, the risk campers were spreading out all over the world, as China’s Manufacturing Index rose. The risk on trading is in full force this morning because of China’s report… So with no further adieu, here’s the skinny!

Overnight, China reported that their Purchasing Managers’ Index (PMI), which tracks manufacturing, just like the PMI here in the US, had gained in September, rising from 51.7 to 53.8… (remember any number above 50 equals expansion) And the risk taking took off!

And of course, any time there’s good economic data from China, the Aussie dollar (A$) gets bought like funnel cakes at a state fair! And that’s exactly what happened overnight!

I have to say that, with this data from China, that I’m going to think more about the Reserve Bank of Australia (RBA) raising interest rates at their meeting next week. Before the Chinese report, the call for a rate hike was about 50-50… But now, I would have to say that we’re 2/3rds on our way to another rate hike in Australia next week!

So… Add the increased prospects of a rate hike in Australia to the news that Chinese manufacturing increased in September, and mix them all up still nice and smooth, and you’ll have a rally in the A$!

But the Big mover and shaker overnight was the euro… Don’t look now, but the euro is trading with a 1.37 handle! And all those naysayers that just a few months ago, were crowing about a breakup of the Eurozone and a collapse of the euro, are no where to be found… In their place are now guys calling for strong moves higher in the euro… I know a guy that called for a multi-year strong dollar rally back in 2008, and then when that didn’t happen, he called for another one just 6 months ago… Now, I’m not here to ridicule any one, but COME ON! With all that’s going on with our unsustainable way of deficit spending here in the US it just seems to be a lay-up to think the dollar has a tough row to hoe for some time to come…

Someone asked me yesterday, why I didn’t refer to the euro as the Big Dog any longer, and should the A$ take the euro’s place as the Big Dog?  Hmmmm… Not unless the A$ takes over as the offset currency to the dollar. Yes, that title held by the euro, was in jeopardy 6 months ago, but no longer… And the Big Dog has returned to lead the pack of non-euro currencies versus the dollar! And now, I see a currency trading company said that the euro will reach 1.50 by the end of December! WOW! These are the same guys that said back in July that the euro would gain 6% in the next two months… So, I guess we should pay attention to what they have to say, eh?

The euro rally was boosted by the risk taking that was going on overnight, but what really got the euro going versus the dollar were some Fed Head speeches… Hold on to your hat here, because the Fed Heads were talking about inflation being too low, and the return of Quantitative Easing (QE). So… With the lead-in, the data cupboard will play a big part in today’s trading.

Remember when Big Al Greenspan had an axe to grind for the Personal Consumption data? Well, what he really watched was the Personal Consumption Expenditure (PCE) Deflator, which is an index that tracks the prices in PCE…  August’s PCE Deflator prints today, and is expected to be 1.5%… I would say that the Fed would react big time should the index print weaker than 1.5%… And any Fed reaction is bad for the dollar…

But then, maybe PCE was like Puff The Magic Dragon, and when Big Al Greenspan went away, the PCE dragon ceased his fearless roar. His head was bent in sorrow, green scales fell like rain, Puff no longer went to play along the cherry lane. Without his life-long friend, puff could not be brave, So puff that mighty dragon sadly slipped into his cave…

So… While we’re talking about US data (yes, we were back a paragraph before I got silly)… The Data Cupboard is overflowing with data today for us! Right out of the starters blocks this morning, we have two of my fave data prints, Personal Income and Spending. Then the PCE data, and a serving of U. of Michigan Consumer Confidence. Then to finish off our data meal, we’ll see Construction Spending, and Vehicle Sales…

So, lots to deal with today, but in the end, the dollar selling will remain in tact, and the dollar will close out the 3rd QTR with one of its worst performing quarters of all time!

Ok… At the top I mentioned the Fantastico Friday that precious metals were having… Gold is up $8 to $1,316 and Silver has maintained $22… A lot of people are wondering if it is worth it to buy Gold at this lofty level… All I can say is that there was another group that was worried about buying Gold at $1,000, and then another group that worried about buying Gold at $1,100, then $1,200…

You have to ask yourself this question… Do you think the dollar is going to continue to weaken for some time to come? (please remember that a trend is not a One-Way street, and we could have volatility (dollar strength) for short periods of time)

If you answered yes, then buying Gold should be considered as wealth protection, at any price… And if you’re on board with the dollar weakness, but still are balking at $1,300 Gold, then you should consider Silver… Hey! Silver is more than just an investment metal, it’s also an industrial metal, so the demand for Silver comes from two groups of buyers… Wink, wink…

And remember yesterday when I said… “and the Brazilian real looks like it could trade below 1.70 for the first time since last November!” Well, as I always say… I love it when a plan comes together! And so it was with Brazilian real, which took my call and ran with it all the way to 1.6866! WOW! Talk about a move!

Now… Here’s where the rubber meets the road folks, will the Brazilian Central Bank step in again, to stem the real’s rise, or have they spent their last Billion dollars doing so, or… Most likely, they’ve seen that intervention doesn’t work! But, if the Brazilian Central Bank does muster up the nerve to intervene again, we could see the real back off this lofty 1.68 handle…

And as the members of the House go back to campaign and attempt to salvage their political careers, they have in their back pocket a measure to place tariffs on Chinese imports… But, as they get in their chauffeured limos, they will probably hear that last night, Japan’s Prime Minister, Kan, told the press that he’s “prepared to resume selling the country’s currency to prevent it from strengthening.” He also called on the Bank of Japan to do more to fight deflation…

Yes, there right out in the open, the Japanese PM said he’s going to manipulate his currency weaker versus the dollar… And yet, our representatives are going after China…

Again… Nov. 2nd… Take the trash out! These guys are driving us over a cliff! We can see it, but they can’t!

And… Before I head to the Big Finish, I noticed this morning that the price of Oil is back to $80… The dollar is getting hit from 3 corners… Currencies, precious metals, and Oil…

Then there was this… Did you know that it only takes 38 states to convene a Constitutional Convention? I was in meetings with the my “other” job colleagues the other day, and I was explaining this Constitutional Convention to them… So far Governors of 35 states have filed suite against the Federal Gov’t. for imposing unlawful burdens on them.  Here’s what I would like to see… I would love for a Constitutional Convention to convene, and repeal 1913… Repeal the agencies… And a host of other things…

It is… We the People… Right? Then We the People should decide what bills, amendments, etc. we want…

Ok… Maybe that’s all wishful thinking…

To recap… Chinese manufacturing gained ground in September, and that brought even more risk takers out to play. The euro got a boost from the Chinese data, but also from the Fed Heads who all talked about how low inflation was, and the need to do something about it, which means more QE. And the A$ also saw buying after the Chinese data. The US data cupboard is overflowing with data today to end the month and quarter, that has seen the currencies & precious metals kick sand in the dollar’s face.

Chuck Butler
for The Daily Reckoning

Chinese Manufacturing Grows 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:
Chinese Manufacturing Grows




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

Economic Data Trends Improving

October 1st, 2010

Those who were looking for some sort of unambiguously bullish number from this morning’s ISM manufacturing survey may have been disappointed, but as the chart below shows, economic data relative to expectations have taken on a much more bullish tone since the end of August.

Uncategorized

The Biggest Disconnect of All Time

October 1st, 2010

Mike Larson

I’m seeing one of the biggest disconnects of all time — between the underlying U.S. economy and the performance of the stock market. Just consider what we’ve learned about the economic fundamentals in the past several days …

• Consumer confidence plunged in September — to 48.5 from 53.2 in August. That was far below the 53 reading economists were expecting, and the worst in seven months.

• The Richmond Fed’s manufacturing index plunged from 11 in August to NEGATIVE 2 in September. Economists were looking for a reading of 6. That was the worst since January. The report followed a dismal Dallas Fed reading from a day prior. That region’s index tanked to -17.7 from -13.5 in August.

• The housing market? Yeah, it still stinks. New home sales flat-lined at 288,000 in August, the second-worst month in U.S. history. Home prices fell to their lowest level since December 2003. Builder confidence held at the lowest level since early 2009. Existing home sales bounced a bit, but they recouped less than a third of their 27 percent July swan dive.

In other words, things aren’t getting better in the real world. They’re getting worse! But on Wall Street it’s party time. Investors are essentially the most bullish they’ve ever been. And it looks like September 2010 could be the best for stocks of any September in seven decades.

What’s going on?

Promise of Free Money
Distorting Markets …

Once upon a time not so long ago, asset class performance closely tracked the underlying fundamentals. If oil supplies rose, oil prices fell. If income, jobs, production, and corporate profits gained, so did stocks. If the economy improved, bond prices fell and interest rates rose. You get the picture.

But these days, it’s a different story …

Stocks, bonds, commodities, and other assets are trading in virtual lock step thanks to the Fed’s most dramatic intervention and interference in the markets of all time. All it takes is a whisper of “quantitative easing” and stocks take off, bonds take off, commodities take off, and the dollar implodes.

Housing is the one sector the Fed has not been able to revive.
Housing is the one sector the Fed has not been able to revive.

About the only asset class that’s NOT responding to all this free money talk is the one asset the Fed probably wants to respond the most — housing.

The latest S&P Case-Shiller report showed that home prices resumed their deterioration in July, falling 0.1 percent. Prices are down 3.6 percent since the Fed rolled out QE1 in November 2008 and 28 percent since the peak of the market four years ago.

Stated another way, the fundamentals haven’t mattered lately. Stocks are reacting to the prospect of the Fed debasing our currency. That debasement is driving up asset values, as well as contra-dollar investments and the price of almost everything we consume.

A few examples:

  • Gold has surged almost $300 an ounce from its February low,
  • Copper has jumped 188 percent from its recent low,
  • Corn has exploded 58 percent,
  • Wheat has climbed 65 percent,
  • And sugar has risen 90 percent.

… But the Disconnect Simply Cannot Last

Stock market bulls would have you believe this will last to infinity and beyond. “Don’t fight the Fed,” they say.

I have a different take. “Fighting the Fed” may sting a bit in the SHORT TERM. But it has been an incredibly successful strategy over the LONGER TERM.

For instance …

You could’ve “fought the Fed” by shorting the heck out of housing and mortgage stocks even as Fed officials told you the problems in those sectors were “contained.” Doing so would have made you a fortune!

You could’ve “fought the Fed” by selling stocks into every single interest rate cut between 2008 and 2009. The Fed first lowered interest rates from 5.25 percent in September 2007. The Dow traded at 13,820 then. It proceeded to plunge to 6,470 over the ensuing couple of years.

I'd be a seller now, not a buyer.
I’d be a seller now, not a buyer.

And you could’ve “fought the Fed” back in 2000, when Alan Greenspan was singing the praises of the technology revolution even as the Nasdaq was about to crash.

The list of Fed policy failures and economic forecasting blunders goes on and on and on.

So to answer the question I’ve been hearing lately, no, I wouldn’t be buying stocks willy nilly because of the Fed. I’d be selling into the rally, and positioning for downside gains in vulnerable sectors using options and inverse ETFs.

And unless and until the real economy takes a turn for the better, the Fed’s QE2 program should ultimately fail to levitate stocks over the longer term.

Until next time,

Mike

Related posts:

  1. Solving the Mystery of the “Great Disconnect”
  2. The Biggest Rip-off of All Time
  3. The Biggest Threat to Investor Wealth! EVER!

Read more here:
The Biggest Disconnect of All Time

Commodities, ETF, Mutual Fund, OPTIONS, Uncategorized

The Biggest Disconnect of All Time

October 1st, 2010

Mike Larson

I’m seeing one of the biggest disconnects of all time — between the underlying U.S. economy and the performance of the stock market. Just consider what we’ve learned about the economic fundamentals in the past several days …

• Consumer confidence plunged in September — to 48.5 from 53.2 in August. That was far below the 53 reading economists were expecting, and the worst in seven months.

• The Richmond Fed’s manufacturing index plunged from 11 in August to NEGATIVE 2 in September. Economists were looking for a reading of 6. That was the worst since January. The report followed a dismal Dallas Fed reading from a day prior. That region’s index tanked to -17.7 from -13.5 in August.

• The housing market? Yeah, it still stinks. New home sales flat-lined at 288,000 in August, the second-worst month in U.S. history. Home prices fell to their lowest level since December 2003. Builder confidence held at the lowest level since early 2009. Existing home sales bounced a bit, but they recouped less than a third of their 27 percent July swan dive.

In other words, things aren’t getting better in the real world. They’re getting worse! But on Wall Street it’s party time. Investors are essentially the most bullish they’ve ever been. And it looks like September 2010 could be the best for stocks of any September in seven decades.

What’s going on?

Promise of Free Money
Distorting Markets …

Once upon a time not so long ago, asset class performance closely tracked the underlying fundamentals. If oil supplies rose, oil prices fell. If income, jobs, production, and corporate profits gained, so did stocks. If the economy improved, bond prices fell and interest rates rose. You get the picture.

But these days, it’s a different story …

Stocks, bonds, commodities, and other assets are trading in virtual lock step thanks to the Fed’s most dramatic intervention and interference in the markets of all time. All it takes is a whisper of “quantitative easing” and stocks take off, bonds take off, commodities take off, and the dollar implodes.

Housing is the one sector the Fed has not been able to revive.
Housing is the one sector the Fed has not been able to revive.

About the only asset class that’s NOT responding to all this free money talk is the one asset the Fed probably wants to respond the most — housing.

The latest S&P Case-Shiller report showed that home prices resumed their deterioration in July, falling 0.1 percent. Prices are down 3.6 percent since the Fed rolled out QE1 in November 2008 and 28 percent since the peak of the market four years ago.

Stated another way, the fundamentals haven’t mattered lately. Stocks are reacting to the prospect of the Fed debasing our currency. That debasement is driving up asset values, as well as contra-dollar investments and the price of almost everything we consume.

A few examples:

  • Gold has surged almost $300 an ounce from its February low,
  • Copper has jumped 188 percent from its recent low,
  • Corn has exploded 58 percent,
  • Wheat has climbed 65 percent,
  • And sugar has risen 90 percent.

… But the Disconnect Simply Cannot Last

Stock market bulls would have you believe this will last to infinity and beyond. “Don’t fight the Fed,” they say.

I have a different take. “Fighting the Fed” may sting a bit in the SHORT TERM. But it has been an incredibly successful strategy over the LONGER TERM.

For instance …

You could’ve “fought the Fed” by shorting the heck out of housing and mortgage stocks even as Fed officials told you the problems in those sectors were “contained.” Doing so would have made you a fortune!

You could’ve “fought the Fed” by selling stocks into every single interest rate cut between 2008 and 2009. The Fed first lowered interest rates from 5.25 percent in September 2007. The Dow traded at 13,820 then. It proceeded to plunge to 6,470 over the ensuing couple of years.

I'd be a seller now, not a buyer.
I’d be a seller now, not a buyer.

And you could’ve “fought the Fed” back in 2000, when Alan Greenspan was singing the praises of the technology revolution even as the Nasdaq was about to crash.

The list of Fed policy failures and economic forecasting blunders goes on and on and on.

So to answer the question I’ve been hearing lately, no, I wouldn’t be buying stocks willy nilly because of the Fed. I’d be selling into the rally, and positioning for downside gains in vulnerable sectors using options and inverse ETFs.

And unless and until the real economy takes a turn for the better, the Fed’s QE2 program should ultimately fail to levitate stocks over the longer term.

Until next time,

Mike

Related posts:

  1. Solving the Mystery of the “Great Disconnect”
  2. The Biggest Rip-off of All Time
  3. The Biggest Threat to Investor Wealth! EVER!

Read more here:
The Biggest Disconnect of All Time

Commodities, ETF, Mutual Fund, OPTIONS, Uncategorized

Major Moves Sep: Promising Launches, Stagnating Assets

October 1st, 2010

September was a month for the markets that ended up being the best in a very long time. The Dow Jones was up 7.7% for the month, the best September performance for the Dow since the 1930s while the S&P500 ended up 8.8% which is the best since the 1950s. The Nasdaq beat the other two indices to deliver 12% returns on the month. The sharp market rally kicked off on talks of QE2 being in the works and the possibility more money flowing into the economy from the US Fed.

For actively-managed ETFs, the month was mixed, with several ETFs seeing major declines in their asset base, but others gaining to make up for the losses. But the sector was not lacking in activity by any means. Two new funds, the PIMCO Build America Bond Strategy Fund (BABZ: 50.45 0.00%) and the WisdomTree Dreyfus Commodity Currency Fund [[CCX], were launched from probably the two issuers that have seen the most success so far in the Active ETF space. We also new interest from additional issuers like Janus Capital and The Hartford, both of whom filed with the SEC seeking exemptive relief to launch actively-managed ETFs.

PIMCO’s success in the ETF industry since their entrance was also recognized in a study done by Cogent Research that reported PIMCO ranking fourth in amongst ETF providers in terms of advisor loyalty. That should definitely give assurance to other large mutual fund companies such as Legg Mason, Eaton Vance and T. Rowe Price that they can also successfully build customer loyalty despite being late entrants into the ETF industry. And most recently, ActiveETFs | InFocus also conducted an extensive study on bid-ask spreads within the Active ETF space and evaluated how the various actively-managed ETFs stack up.

Fund Flows:

(Click table to enlarge)

Total assets within actively-managed ETFs hardly budged from August to September, with cumulative AUM finishing at $2.21 billion, with a small decrease of $4 million in assets. However, that wasn’t because there weren’t major changes in individual funds. Like every month, the PIMCO Enhanced Short Maturity Fund (MINT: 100.92 0.00%) experienced flows that were quite indicative of market sentiment. With the market rallying strongly in the month, cash holdings were reduced, and that showed in the $168 million that flowed out of MINT. However, that outflow was countered by the continued success of WisdomTree’s currency funds and its fixed-income ETF. Specifically, the WisdomTree Dreyfus Brazilian Real Fund (BZF: 28.91 0.00%) and the WisdomTree Dreyfus Emerging Currency Fund (CEW: 22.92 0.00%) together gained about $35 million in assets. But the biggest gainer was WisdomTree’s Emerging Market Local Debt Fund (ELD: 52.55 0.00%), which has been quite popular with investors, gaining more than $75 million in assets.

PIMCO’s Build America Bond Strategy Fund (BABZ: 50.45 0.00%) was launched only on Sep 20th, but already has $13.1 million, being the only ETF in the market that provides active management exposure to Build America Bonds. The other new Active ETF to launch on Sep 24th was the WisdomTree Dreyfus Commodity Currency Fund (CCX: 25.26 0.00%) that ended the month with $5 million in assets. Both these funds carry with them a strong “investment story” that investors can buy into. Build America Bonds (BABs) are still very much in demand and BABZ differentiates itself by providing an actively-managed portfolio of BABs. CCX focuses on providing exposure to currencies of commodity-producing countries, aiming to benefit from any commodities boom that will result in capital flows into those countries, thereby bringing about appreciation in those currencies.

Notable mention also goes to the iShares Diversified Alternatives Trust (ALT: 50.5874 0.00%), which has continuously gathered assets month-on-month. In September, it has gotten close to surpassing the $100 million mark, increasing by another $11 million this month. ALT is managed through several hedge fund style strategies such as “Yield and Futures Curve Arbitrage”, “Technical Strategies” and “Fundamental Relative Value Strategies”. ALT looks to maintain an absolute return profile and clearly has held some appeal for investors.

(Click table to enlarge)

In Canada, Horizon AlphaPro’s actively-managed ETFs saw incremental flows of $11 million, seen primarily in the AlphaPro Seasonal Rotation Fund (HAC) and the new Corporate Bond Fund (HAB). HAB is easily AlphaPro’s largest fund, standing at $240 million in assets and also being the only actively-managed bond ETF in Canada.

Head to our Active ETFs Database for a more dynamic listing of all Active ETFs.

New Entrants, Filings and Closures:

1. AdvisorShares withdraws application for Emerald Rock Active ETFs – direct link

2. Janus Capital files for Active ETFs – direct link

3. The Hartford enters the Active ETF arena – direct link

Disclosure: No positions in above-mentioned names.

If you haven’t already subscribed to ActiveETFs | InFocus, do it here via Email or via RSS feed!

Commodities, ETF, Mutual Fund

Major Moves Sep: Promising Launches, Stagnating Assets

October 1st, 2010

September was a month for the markets that ended up being the best in a very long time. The Dow Jones was up 7.7% for the month, the best September performance for the Dow since the 1930s while the S&P500 ended up 8.8% which is the best since the 1950s. The Nasdaq beat the other two indices to deliver 12% returns on the month. The sharp market rally kicked off on talks of QE2 being in the works and the possibility more money flowing into the economy from the US Fed.

For actively-managed ETFs, the month was mixed, with several ETFs seeing major declines in their asset base, but others gaining to make up for the losses. But the sector was not lacking in activity by any means. Two new funds, the PIMCO Build America Bond Strategy Fund (BABZ: 50.45 0.00%) and the WisdomTree Dreyfus Commodity Currency Fund [[CCX], were launched from probably the two issuers that have seen the most success so far in the Active ETF space. We also new interest from additional issuers like Janus Capital and The Hartford, both of whom filed with the SEC seeking exemptive relief to launch actively-managed ETFs.

PIMCO’s success in the ETF industry since their entrance was also recognized in a study done by Cogent Research that reported PIMCO ranking fourth in amongst ETF providers in terms of advisor loyalty. That should definitely give assurance to other large mutual fund companies such as Legg Mason, Eaton Vance and T. Rowe Price that they can also successfully build customer loyalty despite being late entrants into the ETF industry. And most recently, ActiveETFs | InFocus also conducted an extensive study on bid-ask spreads within the Active ETF space and evaluated how the various actively-managed ETFs stack up.

Fund Flows:

(Click table to enlarge)

Total assets within actively-managed ETFs hardly budged from August to September, with cumulative AUM finishing at $2.21 billion, with a small decrease of $4 million in assets. However, that wasn’t because there weren’t major changes in individual funds. Like every month, the PIMCO Enhanced Short Maturity Fund (MINT: 100.92 0.00%) experienced flows that were quite indicative of market sentiment. With the market rallying strongly in the month, cash holdings were reduced, and that showed in the $168 million that flowed out of MINT. However, that outflow was countered by the continued success of WisdomTree’s currency funds and its fixed-income ETF. Specifically, the WisdomTree Dreyfus Brazilian Real Fund (BZF: 28.91 0.00%) and the WisdomTree Dreyfus Emerging Currency Fund (CEW: 22.92 0.00%) together gained about $35 million in assets. But the biggest gainer was WisdomTree’s Emerging Market Local Debt Fund (ELD: 52.55 0.00%), which has been quite popular with investors, gaining more than $75 million in assets.

PIMCO’s Build America Bond Strategy Fund (BABZ: 50.45 0.00%) was launched only on Sep 20th, but already has $13.1 million, being the only ETF in the market that provides active management exposure to Build America Bonds. The other new Active ETF to launch on Sep 24th was the WisdomTree Dreyfus Commodity Currency Fund (CCX: 25.26 0.00%) that ended the month with $5 million in assets. Both these funds carry with them a strong “investment story” that investors can buy into. Build America Bonds (BABs) are still very much in demand and BABZ differentiates itself by providing an actively-managed portfolio of BABs. CCX focuses on providing exposure to currencies of commodity-producing countries, aiming to benefit from any commodities boom that will result in capital flows into those countries, thereby bringing about appreciation in those currencies.

Notable mention also goes to the iShares Diversified Alternatives Trust (ALT: 50.5874 0.00%), which has continuously gathered assets month-on-month. In September, it has gotten close to surpassing the $100 million mark, increasing by another $11 million this month. ALT is managed through several hedge fund style strategies such as “Yield and Futures Curve Arbitrage”, “Technical Strategies” and “Fundamental Relative Value Strategies”. ALT looks to maintain an absolute return profile and clearly has held some appeal for investors.

(Click table to enlarge)

In Canada, Horizon AlphaPro’s actively-managed ETFs saw incremental flows of $11 million, seen primarily in the AlphaPro Seasonal Rotation Fund (HAC) and the new Corporate Bond Fund (HAB). HAB is easily AlphaPro’s largest fund, standing at $240 million in assets and also being the only actively-managed bond ETF in Canada.

Head to our Active ETFs Database for a more dynamic listing of all Active ETFs.

New Entrants, Filings and Closures:

1. AdvisorShares withdraws application for Emerald Rock Active ETFs – direct link

2. Janus Capital files for Active ETFs – direct link

3. The Hartford enters the Active ETF arena – direct link

Disclosure: No positions in above-mentioned names.

If you haven’t already subscribed to ActiveETFs | InFocus, do it here via Email or via RSS feed!

Commodities, ETF, Mutual Fund

When Only a Much Weaker Dollar Will Do, Part Two of Two

October 1st, 2010

How large a decline in the dollar is required to allow for a meaningful adjustment in relative wages? While it is impossible to make precise estimates, taking a look at real effective exchange rates, which allow for such cross-border wage comparisons, something on the order of 30-40% is probably required. This is in addition to the approximately 20% devaluation of the dollar that has already taken place since 2002, when the current downtrend began.

Once unemployment declines far enough, say to 5% or so, wage pressures are likely to build.  Eventually, wages will rise to the point that they enable households to service previously accumulated debt burdens. Once that happens, sustainable growth will again be possible, although households will find that their global purchasing power and relative standard of living has declined dramatically. This is another lesson of the stagflationary 1970s, in which the US standard of living was more or less stagnant yet that of the ROW, including Japan and Germany, increased markedly.

Those who recall the 1970s must wonder why on earth the Fed would want to enact policies which would in all probability lead to a similar set of stagflationary conditions. Well, the Fed might claim that it doesn’t have much of a choice. Once originated, debt needs to be serviced. It can however be serviced in a strong or in a weak currency. A country with a solid infrastructure and industrial base and with plentiful natural resources might manage to service debt in a strong currency just fine. Indeed, had the US run up its accumulated debt in order to finance sensible investment projects over the years, it would most probably be able to manage to service this debt without resorting to dollar devaluation. But sadly, much of the debt the US has piled on in recent decades has been used to finance consumption rather than investment. And to the extent that the US has invested in rather than consumed capital, much of it went into malinvestments: the dot.com and subsequently far more massive housing and securitized credit bubble, which grew with the support of all manner of federal subsidies–courtesy of Fannie and Freddie, among other federal agencies–and, of course, artificially low Fed interest rates.

The debt-financed consumption and housing boom is now over. Yet the debt remains. It cannot be properly serviced with the existing productive resources of the economy. As such, the debt needs to be either devalued or defaulted on. The Fed and US policymakers generally have made it exceedingly clear that they prefer to devalue–inflate–the debt burden away rather than to go through a comprehensive default and debt restructuring process.

Of course that other road could be taken. But why are policymakers so dead set against it? Well believe it or not, Chairman Bernanke himself has previously weighed in on this matter. In his opinion, it comes down to politics and the ability, or inability, to make tough choices:

[R]estoring banks and corporations to solvency and implementing significant structural change are necessary for … long-run economic health. But in the short run, comprehensive economic reform will likely impose large costs on many, for example, in the form of unemployment or bankruptcy. As a natural result, politicians, economists, businesspeople, and the general public … have sharply disagreed about competing proposals for reform. In the resulting political deadlock, strong policy actions are discouraged, and cooperation among policymakers is difficult to achieve. [emphasis added]

Now wait a minute. When did Bernanke say that he preferred “comprehensive economic reform” rather than zero interest rates and open-ended liquidity creation (e.g. quantitative easing)? Well guess what, he was not talking about the US in the above paragraph, but rather about Japan. What Mr. Bernanke thinks is required for Japan to achieve “long-run economic health” somehow doesn’t apply to the United States!

But of course it does. The above quote indicates that he probably knows that it does. But as he also says above, to take such action “will likely impose large costs on many”. Indeed it would, including of course those financial institutions supposedly regulated by the Fed, many of which have been bailed out, yet are still sitting on large holdings of bad loans and toxic securitized debt. It is much easier to understand recent Fed policy actions in light of the above admission that the Fed is focused primarily, perhaps exclusively, on the short-run health of the financial system rather than long-run health of the US economy generally.

It is quite possible that the euro-area governments, Japan and other countries will resist a US Fed policy of foreign asset purchases by countering with purchases of their own, the net result being that the dollar does not devalue but rather that the global money supply soars. There is no doubt that, in this situation, investors will attempt to escape the risk of a general, global fiat currency devaluation by fleeing into real assets, most probably liquid commodities, including of course precious metals. An all-out currency war could thus spark an incipient hyperinflation which, if policymakers did not take immediate action to restore fiat currency credibility–possibly by implementing Volcker-style rigid money supply targets, or even by pegging to gold–could spiral out of control. While we consider a global hyperinflation scare unlikely, the fact that a global currency war has begun should give investors pause for thought.

Regards,

John Butler,
for The Daily Reckoning

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

When Only a Much Weaker Dollar Will Do, Part Two of Two 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:
When Only a Much Weaker Dollar Will Do, Part Two of Two




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

When Only a Much Weaker Dollar Will Do, Part Two of Two

October 1st, 2010

How large a decline in the dollar is required to allow for a meaningful adjustment in relative wages? While it is impossible to make precise estimates, taking a look at real effective exchange rates, which allow for such cross-border wage comparisons, something on the order of 30-40% is probably required. This is in addition to the approximately 20% devaluation of the dollar that has already taken place since 2002, when the current downtrend began.

Once unemployment declines far enough, say to 5% or so, wage pressures are likely to build.  Eventually, wages will rise to the point that they enable households to service previously accumulated debt burdens. Once that happens, sustainable growth will again be possible, although households will find that their global purchasing power and relative standard of living has declined dramatically. This is another lesson of the stagflationary 1970s, in which the US standard of living was more or less stagnant yet that of the ROW, including Japan and Germany, increased markedly.

Those who recall the 1970s must wonder why on earth the Fed would want to enact policies which would in all probability lead to a similar set of stagflationary conditions. Well, the Fed might claim that it doesn’t have much of a choice. Once originated, debt needs to be serviced. It can however be serviced in a strong or in a weak currency. A country with a solid infrastructure and industrial base and with plentiful natural resources might manage to service debt in a strong currency just fine. Indeed, had the US run up its accumulated debt in order to finance sensible investment projects over the years, it would most probably be able to manage to service this debt without resorting to dollar devaluation. But sadly, much of the debt the US has piled on in recent decades has been used to finance consumption rather than investment. And to the extent that the US has invested in rather than consumed capital, much of it went into malinvestments: the dot.com and subsequently far more massive housing and securitized credit bubble, which grew with the support of all manner of federal subsidies–courtesy of Fannie and Freddie, among other federal agencies–and, of course, artificially low Fed interest rates.

The debt-financed consumption and housing boom is now over. Yet the debt remains. It cannot be properly serviced with the existing productive resources of the economy. As such, the debt needs to be either devalued or defaulted on. The Fed and US policymakers generally have made it exceedingly clear that they prefer to devalue–inflate–the debt burden away rather than to go through a comprehensive default and debt restructuring process.

Of course that other road could be taken. But why are policymakers so dead set against it? Well believe it or not, Chairman Bernanke himself has previously weighed in on this matter. In his opinion, it comes down to politics and the ability, or inability, to make tough choices:

[R]estoring banks and corporations to solvency and implementing significant structural change are necessary for … long-run economic health. But in the short run, comprehensive economic reform will likely impose large costs on many, for example, in the form of unemployment or bankruptcy. As a natural result, politicians, economists, businesspeople, and the general public … have sharply disagreed about competing proposals for reform. In the resulting political deadlock, strong policy actions are discouraged, and cooperation among policymakers is difficult to achieve. [emphasis added]

Now wait a minute. When did Bernanke say that he preferred “comprehensive economic reform” rather than zero interest rates and open-ended liquidity creation (e.g. quantitative easing)? Well guess what, he was not talking about the US in the above paragraph, but rather about Japan. What Mr. Bernanke thinks is required for Japan to achieve “long-run economic health” somehow doesn’t apply to the United States!

But of course it does. The above quote indicates that he probably knows that it does. But as he also says above, to take such action “will likely impose large costs on many”. Indeed it would, including of course those financial institutions supposedly regulated by the Fed, many of which have been bailed out, yet are still sitting on large holdings of bad loans and toxic securitized debt. It is much easier to understand recent Fed policy actions in light of the above admission that the Fed is focused primarily, perhaps exclusively, on the short-run health of the financial system rather than long-run health of the US economy generally.

It is quite possible that the euro-area governments, Japan and other countries will resist a US Fed policy of foreign asset purchases by countering with purchases of their own, the net result being that the dollar does not devalue but rather that the global money supply soars. There is no doubt that, in this situation, investors will attempt to escape the risk of a general, global fiat currency devaluation by fleeing into real assets, most probably liquid commodities, including of course precious metals. An all-out currency war could thus spark an incipient hyperinflation which, if policymakers did not take immediate action to restore fiat currency credibility–possibly by implementing Volcker-style rigid money supply targets, or even by pegging to gold–could spiral out of control. While we consider a global hyperinflation scare unlikely, the fact that a global currency war has begun should give investors pause for thought.

Regards,

John Butler,
for The Daily Reckoning

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

When Only a Much Weaker Dollar Will Do, Part Two of Two 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:
When Only a Much Weaker Dollar Will Do, Part Two of Two




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

Three ETFs To Play Global Water Scarcity

October 1st, 2010

Both macro and microeconomic forces suggest that the global water sector is destined to see exponential growth paving the path to opportunity for the PowerShares Water Resources (PHO), the PowerShares Global Water (PIO) and the Guggenheim S&P Global Water (CGW).

From a macro perspective, incomes in developing nations are expected to rise and populations around the world are expected to continue to expand pushing up demand for water.  In fact, at current growth rates, it is expected that demand for water will grow by nearly 6 percent annually.  This growth is expected to be most prevalent in emerging Asia, where India is expected to see its water demand more than double and China’s to rise by more than 30 percent over the next 20 years. 

Further price support in the essential commodity is likely to be driven by a deficiency in supply.  Of the water that can be found around the world, a mere 1% can be used for agricultural purposes and human consumption.  Additionally, research suggests that soil moisture levels on Earth are declining which could potentially lead to depletion in fresh water tables around the world. 

Global supply constraints are further being enhanced due to rapid growth that has been seen in Asian nation’s which has lead to contamination of rivers and lakes and polluted groundwater.  In fact, the World Bank estimates that China’s growth is expected to result in a supply shortfall of nearly 200 billion cubic feet within the next two decades.   

In a nutshell, a monumental supply and demand imbalance is developing in the water sector which will likely result in water scarcity and force an influx of investment into the sector on both the domestic and international stage.  As mentioned above, some ways to capitalize on the water sector include the following:  

  • PowerShares Water Resources (PHO), which boasts environmental services giant Veolia Environment (VE) and flow control equipment specialists Flowserve Corporation (FLS) in its top holdings.
  • PowerShares Global Water (PIO) boasts French-based Suez Environment, which specializes in producing, distributing, treating, and recovering water as well as wastewater treatment specialists Kemira Oyj in its top holdings.
  • Guggenheim S&P Global Water (CGW) holds Swiss-based Geberit AG, which specializes in water sanitary systems and the transportation of water through piping systems.

Although an opportunity seems to exist in the global water sector, it is important to consider the inherent risks that are involved with investing in commodity driven securities.  To help protect against these risks, the use of an exit strategy which identifies specific price point at which a downward price pressure is likely to be seen is important.  Such a strategy can be found at www.SmartStops.net.

Disclosure: No Positions

Read more here:
Three ETFs To Play Global Water Scarcity




HERE IS YOUR FOOTER

Uncategorized

Insane Pattern: Stocks Gain More on First Day of Month Than Rest of Month Combined

September 30th, 2010

My cover is blown.  Months ago, I figured out what I believe to be the most insanely profitable and market-edge strategies of all time.  Imagine being able to go to the casino and play Roulette with as much money as you like but instead of the house having a small advantage over you due to the 2 green slots, you have a substantial edge of the house.  Using closing daily share price date for the S&P500 (SPY) I went through and numerically calculated the percentage gains of various time periods throughout the prior ten years to see if I could find any patterns – and I did.  I found that using the S&P500 (SPY), if you buy on the last day of the month and sell a day later, your gains blew away the returns of buy and hold over the prior decade.  I found some other interesting patterns as well, which I’ll get into later.

I know, I know, you’re probably questioning why I didn’t share this one with you like I shared how profitable shorting leveraged ETFs can be and the easiest money on a gold pairs trade I’ve ever made.  Well, I was keeping this one to myself because once the secret’s out, market information is dispersed and arbitrage fills in the inefficiencies like gas fills a vacuum.  Well, when the USAToday reported a similar finding today, apparently lifted from the Stock Trader’s Almanac, I figured the cat’s already out of the bag.  I’m not just going to regurgitate their article though.  I did this analysis myself, much more thoroughly and it runs up through June 2010, not May 2009 which their data does.

Why Do Stocks Outperform on Day 1?

While the article at USAToday listed a few ideas, the most plausible to me is that millions of 401(k)s, pension funds, IRAs and other funds flow IN on the first day of the month, thus driving shares up.  Due to this effect somewhat driving shares unnaturally above a perceived “fair value”, market forces being what they are, funds flow back out elsewhere in the month as stocks are perceived to be overvalued.  This might seem implausible on a small scale, but across billions of transactions, millions of traders and hundreds of data points across 10 years, the data is irrefutable and the hypothesis certainly seems plausible to me.

Their findings basically pointed to a buy on the last day/sell on the first day strategy delivering a gain of 4,399 1st day of the month vs. a loss of 3,809 for the rest of the month. Unfortunately, they were referring to the DJIA and what was reported here isn’t that granular.

My data is based on the S&P500 and I discovered some more interesting patterns (From Jan 2000-June 2010):

  • Your Gain was 33% over the decade as opposed to nothing staying long. Now, spread over 10 years, that doesn’t sound like much, but if you’re pulling that money out and investing in a money market on the side to boost another 2% per year, using leverage or otherwise boosting your returns in between, it’s certainly nothing to cough at in comparison to barely breaking even staying long stocks.
  • There was NEVER a single year in which the strategy lost more often than it won. So much for standard deviation wiping out your strategy huh?  The worst I ever came across was in 2006 when it was 6 to 6.  Most other years were 8 to 4, 7 to 5 and even a 9 to 3 in there.
  • Here’s the Goodie they didn’t tell you about: Since I ran all kinds of scenarios, what I found was that holding for 2 days actually outperformed the 1 day strategy, boosting your return to about 40%.  From there, it starts to decline again over the hundreds of data points involved.
  • The trend has been very strong in 2010 with the past couple months bringing in big returns for my trades. This might lead you to wonder if you’re better skipping or shorting on months where the trend already went up a few times in a row…
  • There is no benefit to trying to predict trends. The strategy is just as likely to work (with statistical significance) on a month where the prior month was down vs. the prior 3 months down vs. the prior month up or prior 4 months up.  It’s totally random, but with a slight positive bias of course.

Of course, in order for this to work, you’ve gotta keep your transaction costs down (see how to Trade ETFs Free), use large sums to outweigh those costs and you should only keep your investments steady or increase in step changes but not try to jump around with different amounts each month or you’re basically guessing and you may do a 10X size trade on a bad month and wipe out all your prior earnings and then some.

I’ve discovered a few other trends that I’m refining and I’ll be sure to report back – be sure to follow my RSS for the next update.  For instance, I just went way long with leverage today and we’ll see what happens by Friday or Monday!

Disclosure: Long SPY.

ETF

Insane Pattern: Stocks Gain More on First Day of Month Than Rest of Month Combined

September 30th, 2010

My cover is blown.  Months ago, I figured out what I believe to be the most insanely profitable and market-edge strategies of all time.  Imagine being able to go to the casino and play Roulette with as much money as you like but instead of the house having a small advantage over you due to the 2 green slots, you have a substantial edge of the house.  Using closing daily share price date for the S&P500 (SPY) I went through and numerically calculated the percentage gains of various time periods throughout the prior ten years to see if I could find any patterns – and I did.  I found that using the S&P500 (SPY), if you buy on the last day of the month and sell a day later, your gains blew away the returns of buy and hold over the prior decade.  I found some other interesting patterns as well, which I’ll get into later.

I know, I know, you’re probably questioning why I didn’t share this one with you like I shared how profitable shorting leveraged ETFs can be and the easiest money on a gold pairs trade I’ve ever made.  Well, I was keeping this one to myself because once the secret’s out, market information is dispersed and arbitrage fills in the inefficiencies like gas fills a vacuum.  Well, when the USAToday reported a similar finding today, apparently lifted from the Stock Trader’s Almanac, I figured the cat’s already out of the bag.  I’m not just going to regurgitate their article though.  I did this analysis myself, much more thoroughly and it runs up through June 2010, not May 2009 which their data does.

Why Do Stocks Outperform on Day 1?

While the article at USAToday listed a few ideas, the most plausible to me is that millions of 401(k)s, pension funds, IRAs and other funds flow IN on the first day of the month, thus driving shares up.  Due to this effect somewhat driving shares unnaturally above a perceived “fair value”, market forces being what they are, funds flow back out elsewhere in the month as stocks are perceived to be overvalued.  This might seem implausible on a small scale, but across billions of transactions, millions of traders and hundreds of data points across 10 years, the data is irrefutable and the hypothesis certainly seems plausible to me.

Their findings basically pointed to a buy on the last day/sell on the first day strategy delivering a gain of 4,399 1st day of the month vs. a loss of 3,809 for the rest of the month. Unfortunately, they were referring to the DJIA and what was reported here isn’t that granular.

My data is based on the S&P500 and I discovered some more interesting patterns (From Jan 2000-June 2010):

  • Your Gain was 33% over the decade as opposed to nothing staying long. Now, spread over 10 years, that doesn’t sound like much, but if you’re pulling that money out and investing in a money market on the side to boost another 2% per year, using leverage or otherwise boosting your returns in between, it’s certainly nothing to cough at in comparison to barely breaking even staying long stocks.
  • There was NEVER a single year in which the strategy lost more often than it won. So much for standard deviation wiping out your strategy huh?  The worst I ever came across was in 2006 when it was 6 to 6.  Most other years were 8 to 4, 7 to 5 and even a 9 to 3 in there.
  • Here’s the Goodie they didn’t tell you about: Since I ran all kinds of scenarios, what I found was that holding for 2 days actually outperformed the 1 day strategy, boosting your return to about 40%.  From there, it starts to decline again over the hundreds of data points involved.
  • The trend has been very strong in 2010 with the past couple months bringing in big returns for my trades. This might lead you to wonder if you’re better skipping or shorting on months where the trend already went up a few times in a row…
  • There is no benefit to trying to predict trends. The strategy is just as likely to work (with statistical significance) on a month where the prior month was down vs. the prior 3 months down vs. the prior month up or prior 4 months up.  It’s totally random, but with a slight positive bias of course.

Of course, in order for this to work, you’ve gotta keep your transaction costs down (see how to Trade ETFs Free), use large sums to outweigh those costs and you should only keep your investments steady or increase in step changes but not try to jump around with different amounts each month or you’re basically guessing and you may do a 10X size trade on a bad month and wipe out all your prior earnings and then some.

I’ve discovered a few other trends that I’m refining and I’ll be sure to report back – be sure to follow my RSS for the next update.  For instance, I just went way long with leverage today and we’ll see what happens by Friday or Monday!

Disclosure: Long SPY.

ETF

Insane Pattern: Stocks Gain More on First Day of Month Than Rest of Month Combined

September 30th, 2010

My cover is blown.  Months ago, I figured out what I believe to be the most insanely profitable and market-edge strategies of all time.  Imagine being able to go to the casino and play Roulette with as much money as you like but instead of the house having a small advantage over you due to the 2 green slots, you have a substantial edge of the house.  Using closing daily share price date for the S&P500 (SPY) I went through and numerically calculated the percentage gains of various time periods throughout the prior ten years to see if I could find any patterns – and I did.  I found that using the S&P500 (SPY), if you buy on the last day of the month and sell a day later, your gains blew away the returns of buy and hold over the prior decade.  I found some other interesting patterns as well, which I’ll get into later.

I know, I know, you’re probably questioning why I didn’t share this one with you like I shared how profitable shorting leveraged ETFs can be and the easiest money on a gold pairs trade I’ve ever made.  Well, I was keeping this one to myself because once the secret’s out, market information is dispersed and arbitrage fills in the inefficiencies like gas fills a vacuum.  Well, when the USAToday reported a similar finding today, apparently lifted from the Stock Trader’s Almanac, I figured the cat’s already out of the bag.  I’m not just going to regurgitate their article though.  I did this analysis myself, much more thoroughly and it runs up through June 2010, not May 2009 which their data does.

Why Do Stocks Outperform on Day 1?

While the article at USAToday listed a few ideas, the most plausible to me is that millions of 401(k)s, pension funds, IRAs and other funds flow IN on the first day of the month, thus driving shares up.  Due to this effect somewhat driving shares unnaturally above a perceived “fair value”, market forces being what they are, funds flow back out elsewhere in the month as stocks are perceived to be overvalued.  This might seem implausible on a small scale, but across billions of transactions, millions of traders and hundreds of data points across 10 years, the data is irrefutable and the hypothesis certainly seems plausible to me.

Their findings basically pointed to a buy on the last day/sell on the first day strategy delivering a gain of 4,399 1st day of the month vs. a loss of 3,809 for the rest of the month. Unfortunately, they were referring to the DJIA and what was reported here isn’t that granular.

My data is based on the S&P500 and I discovered some more interesting patterns (From Jan 2000-June 2010):

  • Your Gain was 33% over the decade as opposed to nothing staying long. Now, spread over 10 years, that doesn’t sound like much, but if you’re pulling that money out and investing in a money market on the side to boost another 2% per year, using leverage or otherwise boosting your returns in between, it’s certainly nothing to cough at in comparison to barely breaking even staying long stocks.
  • There was NEVER a single year in which the strategy lost more often than it won. So much for standard deviation wiping out your strategy huh?  The worst I ever came across was in 2006 when it was 6 to 6.  Most other years were 8 to 4, 7 to 5 and even a 9 to 3 in there.
  • Here’s the Goodie they didn’t tell you about: Since I ran all kinds of scenarios, what I found was that holding for 2 days actually outperformed the 1 day strategy, boosting your return to about 40%.  From there, it starts to decline again over the hundreds of data points involved.
  • The trend has been very strong in 2010 with the past couple months bringing in big returns for my trades. This might lead you to wonder if you’re better skipping or shorting on months where the trend already went up a few times in a row…
  • There is no benefit to trying to predict trends. The strategy is just as likely to work (with statistical significance) on a month where the prior month was down vs. the prior 3 months down vs. the prior month up or prior 4 months up.  It’s totally random, but with a slight positive bias of course.

Of course, in order for this to work, you’ve gotta keep your transaction costs down (see how to Trade ETFs Free), use large sums to outweigh those costs and you should only keep your investments steady or increase in step changes but not try to jump around with different amounts each month or you’re basically guessing and you may do a 10X size trade on a bad month and wipe out all your prior earnings and then some.

I’ve discovered a few other trends that I’m refining and I’ll be sure to report back – be sure to follow my RSS for the next update.  For instance, I just went way long with leverage today and we’ll see what happens by Friday or Monday!

Disclosure: Long SPY.

ETF

Copyright 2009-2013 MarketDailyNews.COM

LOG