The US Federal Reserve: A Bank that Will Live in Infamy

December 7th, 2010

“A day that will live in infamy…” – Franklin D. Roosevelt

The Dow ended down 19 points yesterday. Gold up $9.

Thanks to the socialist Senator from Vermont, Bernie Sanders, we get to see what the Fed is up to. He insisted on learning where the Fed’s bailout money was going. Turns out, not only did billions go to European banks…billions more went to firms in the US that pretended they needed no help.

Goldman Sachs, for example.

Goldman went to the Fed 212 times between March 2008 and March 2009, according to Fed documents. It collected nearly $600 billion.

Morgan Stanley. GE. Citigroup. They were all in on it.

The Fed put out $3.3 trillion worth of credit, buying up speculators’ bad bets. Not surprisingly, the price of the bad credits rose. So that now the Fed can say it hasn’t lost a penny.

Ha. Ha. What a sense of humor!

Let’s imagine that instead of banking and speculating…Goldman was a cabbage grower. And let’s say Goldman overdid it. It planted far too much cabbage. The price dropped…and Goldman was on the verge of bankruptcy. So, in comes the Fed…and buys cabbage by the boatload. And what do you know? The price of cabbage goes up. So, the Fed then looks in its warehouse and it finds it owns tons of cabbage. It multiplies the price of cabbage by what it has in inventory. Wow! It hasn’t lost a penny!

The feds are supposed to pursue corrupt operators. But now the feds are at the center of the racket. Talk about infamy? Now, it’s right here at home…

How does the racket work? It’s very simple. The Fed hands out money to its powerful cronies. Remember, the Fed is a private bank. It serves what is supposedly a public purpose. But it is neither owned nor controlled by the government. Instead, it’s part of the banking industry. Its official role is to give the US a trustworthy currency…and (more recently) to promote full employment. You can see how well it fulfilled the fist part of its mission. Consumer prices are up about 33 times since the Fed was formed in 1913.

Or, to look at it another way, a $20 gold piece from pre-Fed days – a one-ounce US gold coin – is now worth about $1,450. How’s that for a stable currency?

As to employment… Before 1913, unemployment was virtually unheard of. Why? There was a free market in labor. If you need to work, you took whatever work you could get at the then-prevailing wage. End of the story. There were no subsidies for people who were unemployed. No minimum wages. No safety nets. It was just supply and demand. When demand for labor increased, so did wages. When it decreased, wages went down. Except for brief periods of adjustment, there was no unemployment.

And now? Well, you know the facts as well as we do.

The Fed’s real mission now is to make sure the banks stay in business and make a profit. This it does in the simplest way – by transferring money to the banks. How does it get the money? It just prints it up. Who pays the bill? Eventually, taxpayers and citizens…when this new money reduces the value of their old money.

Neat huh? Who complains? Who has a cause of action? Who even realizes what is going on?

The European Central Bank is duplicating this trick in the other part of the Old World. It is buying up the debt of Ireland and Greece. And what ho! The more you buy…the more the price goes up. Pretty soon, the ECB – with hundreds of billions of this paper in its vault – will be able to announce that it too has made money!

But there’s a strange smell coming from the central bank vaults. Maybe that cabbage isn’t so good after all.

Bill Bonner
for The Daily Reckoning

The US Federal Reserve: A Bank that Will Live in Infamy 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 US Federal Reserve: A Bank that Will Live in Infamy




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

Uncategorized

The Futility of Tax Cuts Without Spending Cuts

December 7th, 2010

Well… The dollar rally that was going on yesterday morning didn’t have the legs to carry on, and by mid-afternoon we were watching the currencies rebound… I truly feel that this time the currencies were led to higher ground by gold and silver!

The rallies in gold and silver yesterday were the things that legends are made of… Silver hit a 20-year high, and gold raced past its previous high water mark of $1,414.07 set on Friday… And the shiny metal is back at it again this morning, setting yet another record level of $1,426.30…

So… What got the risk assets all lathered up around mid-day yesterday, I hear you asking… Well… Can you say tax cut extensions? I knew you could! The agreement to extend the Bush tax cuts two additional years was reached yesterday… I guess during a recession with 25% unemployment, this is a good thing… But…

It doesn’t change a thing regarding the deficit problems of the US. So much for the Debt Commission’s months of work, eh? It was like a, “Thanks, but no thanks, Debt Commission”… I had a media guy call to interview me yesterday, and he asked me if the tax cut news was going to be good for the dollar… I told him that it might, but that it would only be short-lived, as this is not good news for the dollar in the long run. Well, the markets are looking at this differently than little old me… (HA!) I look at it in the long run… The markets are looking at it right here, right now, and what it does to promote growth.

Hey! Tax cuts (which these really aren’t, as they were cut eight years ago, these are extensions of those cuts), are nice on the pocketbook, eh? But go back eight years and track the dollar’s value since those original tax cuts were announced… You see, short term, the tax cut can promote growth, and bring in receipts… But unless there are spending cuts to go along with the tax cut, the nation’s debt picture is damaged… And since we’ve not seen a spending cut of any magnitude…we’re stuck with a debt picture that is more than damaged… It’s unsustainable!

And the “welfare state” continues to grow… Now, I know this is going to sound insensitive, but I don’t mean it to be… The unemployment benefits were also extended past 99 weeks… Just keep adding up the debts… Our grandkids will be left holding the bill… But that’s the mentality of kicking the can down the road… Just keep kicking it, so that it’s someone else’s problem… Unfortunately, that game can’t go on forever… And unfortunately for us that can keeps growing in size.

Ty sent me a note yesterday… “Greenlight Capital head David Einhorn says gold is going higher, interest rates are way too low, and the US government has no intention of paying its bills.”

So… Meanwhile, grandma’s holding off the Indians…and the dollar is on the run from the currencies and precious metals once again. This “risk on” trading this morning is so strong, that the Aussie dollar (AUD) is rallying toward parity again with the US dollar, in the face of a Reserve Bank of Australia (RBA) meeting that left rates unchanged (no surprise there), but just had to say that “rates are appropriate”…

An Aussie analyst that I read a lot, Sue Trinh, now believes the RBA will be on the sidelines of rate hikes until the middle of 2011. For now, I’m going to leave the light on for a rate hike in the first quarter of 2011…

But, despite the RBA’s statements, the Aussie dollar is nearing parity once again…

And so is the Canadian dollar/loonie (CAD)… The Bank of Canada (BOC) meets today to discuss rates, and like I said yesterday, of the central bank meetings this week (the ECB and Reserve Bank of New Zealand also meet) this is the only one that has a slim chance of a rate hike… But that’s not what’s lit the fire under the loonie… The price of oil reaching $90 has the loonie screaming higher versus the green/peachback.

There’s a meeting going on while I type my fat fingers to the bone, with Eurozone Finance Ministers meeting to discuss the mechanism and the size of the mechanism to combat the debt problems in the future… I was talking about this yesterday when I told you that the euro was getting sold on the fact that the Finance Ministers weren’t singing from the same song sheet… Well… I guess the markets gave up on that, because the euro (EUR) began to rally in the afternoon.

The Eurozone Finance Ministers will announce today the formal approval of the aid package for Ireland… And Ireland, in turn, is expected to vote and pass its 2011 budget…a budget that I’m sure contains a ton of austerity measures that will most likely not be well received by the Irish people.

Speaking of the Eurozone… I made the statement in my presentation in Cabo San Lucas last month, that we could see some of the members of the GIIPS leave the euro in the next few years… A gasp came from the crowd…and I then tried to assure the audience that while initially it would be bad for the euro’s value, that in the long run it would be far better for the euro to get rid of the rift raft… I’ve explained this before, but here goes again… It’s like the buffalo herd… The herd can move faster once the slowest member is killed…

But that’s not going to happen today, tomorrow, or even in the next year, I don’t think… So let’s worry about tomorrow when tomorrow comes… Today is what’s on our plate!

And so it goes… With the potential next periphery county in the Eurozone to have the media focus on their problems… Mario Draghi, governor of the Bank of Italy, said Italian banks have survived the financial crisis in relatively good shape, but some will need to strengthen their finances to comply with capital and liquidity rules outlined by the Basel Committee on Banking Supervision. “Some banks need to work more in order to quickly strengthen their capital base,” he said.

This is how it starts…and then people begin to look under the hood a little more carefully…

OK… Enough of that!

Well… I guess the Big Ben Bernanke talk on 60 Minutes didn’t get the bond guys too lathered up, for Treasury yields are back to rising again this morning, in the face of bond purchases that will be made by the Bernank through quantitative easing… I think we could see this continue, for if I were a foreign investor, I would certainly demand a higher yield in Treasuries before I would risk capital there.

It’s just like I always tell you about Mexico… Investors have been burned in Mexico so many times over the years that the Mexican peso (MXN) needs to pay an interest rate that includes a “risk premium.” Without the additional “risk premium,” investors balk at investing in pesos… And right now, Mexican rates are too low, with no “risk premium” at all… And… The peso wallows around 12.5. Twelve years ago, when I was in Cancun, the peso was less than 10… But back then interest rates included the risk premium.

Sorry for the long explanation, but that’s the kind of thing I think the US will head into in the future, as investors will demand a “risk premium” due to the size of the debt issuance by the US.

Then there was this… I saw this yesterday and I had to go yell at the wall! A study by Daniel J. Wilson of the San Francisco Federal Reserve Bank, suggests that the net job creation from the $814 billion stimulus bill passed in February 2009, was zero by August 2010. In the first year, the stimulus “saved or created” 2 million jobs (not 4 million as repeatedly claimed by the Administration), but this number proved to be short-lived, paying for temporary jobs, at a very high cost of $400,000 per job “saved or created.”

By August 2010, the impact of the stimulus on net job creation had disappeared. This is an astounding result, which destroys the Paul Krugman argument that the economy would be so much better right now if only Congress had approved much more spending in February 2009. Double the initial spending, double the number of temporary jobs, with likely the same net result by this point in time, or a trivial number of “permanent jobs created.” In fact, the unemployment rate is at a substantially higher percentage rate today at 9.8% than when the stimulus bill was passed.

And that’s using the hedonically adjusted BLS method of calculating unemployment… As I told you yesterday, the “real unemployment rate” is nearing 25%…

To recap… The dollar rally ended yesterday mid-day, as the US came to an agreement to extend not only the Bush tax cuts, but the unemployment benefits past 99 weeks. The risk-takers see this as great for global growth, and so it is a “Risk On Day”… Gold and silver led the charge against the dollar yesterday, with silver reaching a 20-year high, and gold setting yet another all-time record high. The RBA lefts rates unchanged and the Bank of Canada meets today.

Chuck Butler

for The Daily Reckoning

The Futility of Tax Cuts Without Spending Cuts 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 Futility of Tax Cuts Without Spending Cuts




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

Uncategorized

The Futility of Tax Cuts Without Spending Cuts

December 7th, 2010

Well… The dollar rally that was going on yesterday morning didn’t have the legs to carry on, and by mid-afternoon we were watching the currencies rebound… I truly feel that this time the currencies were led to higher ground by gold and silver!

The rallies in gold and silver yesterday were the things that legends are made of… Silver hit a 20-year high, and gold raced past its previous high water mark of $1,414.07 set on Friday… And the shiny metal is back at it again this morning, setting yet another record level of $1,426.30…

So… What got the risk assets all lathered up around mid-day yesterday, I hear you asking… Well… Can you say tax cut extensions? I knew you could! The agreement to extend the Bush tax cuts two additional years was reached yesterday… I guess during a recession with 25% unemployment, this is a good thing… But…

It doesn’t change a thing regarding the deficit problems of the US. So much for the Debt Commission’s months of work, eh? It was like a, “Thanks, but no thanks, Debt Commission”… I had a media guy call to interview me yesterday, and he asked me if the tax cut news was going to be good for the dollar… I told him that it might, but that it would only be short-lived, as this is not good news for the dollar in the long run. Well, the markets are looking at this differently than little old me… (HA!) I look at it in the long run… The markets are looking at it right here, right now, and what it does to promote growth.

Hey! Tax cuts (which these really aren’t, as they were cut eight years ago, these are extensions of those cuts), are nice on the pocketbook, eh? But go back eight years and track the dollar’s value since those original tax cuts were announced… You see, short term, the tax cut can promote growth, and bring in receipts… But unless there are spending cuts to go along with the tax cut, the nation’s debt picture is damaged… And since we’ve not seen a spending cut of any magnitude…we’re stuck with a debt picture that is more than damaged… It’s unsustainable!

And the “welfare state” continues to grow… Now, I know this is going to sound insensitive, but I don’t mean it to be… The unemployment benefits were also extended past 99 weeks… Just keep adding up the debts… Our grandkids will be left holding the bill… But that’s the mentality of kicking the can down the road… Just keep kicking it, so that it’s someone else’s problem… Unfortunately, that game can’t go on forever… And unfortunately for us that can keeps growing in size.

Ty sent me a note yesterday… “Greenlight Capital head David Einhorn says gold is going higher, interest rates are way too low, and the US government has no intention of paying its bills.”

So… Meanwhile, grandma’s holding off the Indians…and the dollar is on the run from the currencies and precious metals once again. This “risk on” trading this morning is so strong, that the Aussie dollar (AUD) is rallying toward parity again with the US dollar, in the face of a Reserve Bank of Australia (RBA) meeting that left rates unchanged (no surprise there), but just had to say that “rates are appropriate”…

An Aussie analyst that I read a lot, Sue Trinh, now believes the RBA will be on the sidelines of rate hikes until the middle of 2011. For now, I’m going to leave the light on for a rate hike in the first quarter of 2011…

But, despite the RBA’s statements, the Aussie dollar is nearing parity once again…

And so is the Canadian dollar/loonie (CAD)… The Bank of Canada (BOC) meets today to discuss rates, and like I said yesterday, of the central bank meetings this week (the ECB and Reserve Bank of New Zealand also meet) this is the only one that has a slim chance of a rate hike… But that’s not what’s lit the fire under the loonie… The price of oil reaching $90 has the loonie screaming higher versus the green/peachback.

There’s a meeting going on while I type my fat fingers to the bone, with Eurozone Finance Ministers meeting to discuss the mechanism and the size of the mechanism to combat the debt problems in the future… I was talking about this yesterday when I told you that the euro was getting sold on the fact that the Finance Ministers weren’t singing from the same song sheet… Well… I guess the markets gave up on that, because the euro (EUR) began to rally in the afternoon.

The Eurozone Finance Ministers will announce today the formal approval of the aid package for Ireland… And Ireland, in turn, is expected to vote and pass its 2011 budget…a budget that I’m sure contains a ton of austerity measures that will most likely not be well received by the Irish people.

Speaking of the Eurozone… I made the statement in my presentation in Cabo San Lucas last month, that we could see some of the members of the GIIPS leave the euro in the next few years… A gasp came from the crowd…and I then tried to assure the audience that while initially it would be bad for the euro’s value, that in the long run it would be far better for the euro to get rid of the rift raft… I’ve explained this before, but here goes again… It’s like the buffalo herd… The herd can move faster once the slowest member is killed…

But that’s not going to happen today, tomorrow, or even in the next year, I don’t think… So let’s worry about tomorrow when tomorrow comes… Today is what’s on our plate!

And so it goes… With the potential next periphery county in the Eurozone to have the media focus on their problems… Mario Draghi, governor of the Bank of Italy, said Italian banks have survived the financial crisis in relatively good shape, but some will need to strengthen their finances to comply with capital and liquidity rules outlined by the Basel Committee on Banking Supervision. “Some banks need to work more in order to quickly strengthen their capital base,” he said.

This is how it starts…and then people begin to look under the hood a little more carefully…

OK… Enough of that!

Well… I guess the Big Ben Bernanke talk on 60 Minutes didn’t get the bond guys too lathered up, for Treasury yields are back to rising again this morning, in the face of bond purchases that will be made by the Bernank through quantitative easing… I think we could see this continue, for if I were a foreign investor, I would certainly demand a higher yield in Treasuries before I would risk capital there.

It’s just like I always tell you about Mexico… Investors have been burned in Mexico so many times over the years that the Mexican peso (MXN) needs to pay an interest rate that includes a “risk premium.” Without the additional “risk premium,” investors balk at investing in pesos… And right now, Mexican rates are too low, with no “risk premium” at all… And… The peso wallows around 12.5. Twelve years ago, when I was in Cancun, the peso was less than 10… But back then interest rates included the risk premium.

Sorry for the long explanation, but that’s the kind of thing I think the US will head into in the future, as investors will demand a “risk premium” due to the size of the debt issuance by the US.

Then there was this… I saw this yesterday and I had to go yell at the wall! A study by Daniel J. Wilson of the San Francisco Federal Reserve Bank, suggests that the net job creation from the $814 billion stimulus bill passed in February 2009, was zero by August 2010. In the first year, the stimulus “saved or created” 2 million jobs (not 4 million as repeatedly claimed by the Administration), but this number proved to be short-lived, paying for temporary jobs, at a very high cost of $400,000 per job “saved or created.”

By August 2010, the impact of the stimulus on net job creation had disappeared. This is an astounding result, which destroys the Paul Krugman argument that the economy would be so much better right now if only Congress had approved much more spending in February 2009. Double the initial spending, double the number of temporary jobs, with likely the same net result by this point in time, or a trivial number of “permanent jobs created.” In fact, the unemployment rate is at a substantially higher percentage rate today at 9.8% than when the stimulus bill was passed.

And that’s using the hedonically adjusted BLS method of calculating unemployment… As I told you yesterday, the “real unemployment rate” is nearing 25%…

To recap… The dollar rally ended yesterday mid-day, as the US came to an agreement to extend not only the Bush tax cuts, but the unemployment benefits past 99 weeks. The risk-takers see this as great for global growth, and so it is a “Risk On Day”… Gold and silver led the charge against the dollar yesterday, with silver reaching a 20-year high, and gold setting yet another all-time record high. The RBA lefts rates unchanged and the Bank of Canada meets today.

Chuck Butler

for The Daily Reckoning

The Futility of Tax Cuts Without Spending Cuts 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 Futility of Tax Cuts Without Spending Cuts




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

Should U.S. investors fear a “Japan scenario?”

December 7th, 2010

Nilus Mattive

With Ben Bernanke and the Federal Reserve now into their second round of quantitative easing, a lot of investors are becoming increasingly worried about the U.S. “becoming like Japan.”

In short, they’re starting to wonder whether the entire U.S. economy is entering stagnation so deep that all the money pumping in the world won’t get us out of it — the very same condition that Japan has been suffering with since the early 1990s.

I can see where the fear comes from, especially with Bernanke going on 60 Minutes two nights ago and saying things like,

“We’re not very far from the level where the economy is not self sustaining.”

And …

“It could be four, five years before we are back to a more normal unemployment rate.”

Bernanke even went so far as to suggest that the Fed may expand its current $600-billion program to purchase government bonds!

So today, I’d like to talk a little bit more about “Japan scenarios,” and whether stock investors should be concerned.

Let’s Start With a Little 1990s History …

Japan’s economic malaise began with twin bubbles — first in its stock market, which peaked in 1989, and then in real estate two years later.

Since then, the country’s overall debt levels have skyrocketed to more than twice the country’s GDP … its economic output has been rising less than 1 percent a year on average … and consumer prices have fallen in seven of the last ten years.

And all that has happened in spite of the fact that the Japan’s central bank has kept interest rates at or near zero for nearly a decade!

But what many folks don’t realize is that Japan’s zero-interest-rate policy was spurred on by none other than a group of U.S. academics, including a Princeton professor by the name of Ben Bernanke!

Sure, Japan had already been ratcheting rates down after its crisis began — and by 1996 they were well under 1 percent.

Ben Bernanke was one of the academics who told Japan to use zero interest rates and quantitative easing.
Ben Bernanke was one of the academics who told Japan to use zero interest rates and quantitative easing.

However, it was Bernanke who said Japanese policymakers were making a major mistake by not committing to keep interest rates at rock bottom for as long as it took for signs of growth to emerge.

Ultimately, officials listened to that advice … along with suggestions that they try other relatively experimental approaches such as “quantitative easing,” in which the central bank openly buys loans, securities and other assets.

For a few years it looked like a turnaround was coming, but those hopes were dashed by the recent global economic meltdown. And today, despite all its efforts, Japan is still waiting for a sustained rebound.

Today, Our Federal Reserve Has Gone from
Armchair Quarterback to Throwing Its Own Hail Marys

Ironically, Bernanke and his colleagues now find themselves trying many of the same tactics they once recommended to Japan.

And while there’s no way to know what would have happened without their massive intervention, I don’t think anyone would say they’ve had resounding success yet.

So is that it? Is it the endgame for the U.S. economy? Will deflation take hold?

What’s interesting this time around is that we’re seeing a huge divergence in prices.

Some things, especially commodities, have been rocketing higher and higher … and creating pockets of inflation.

Meanwhile, many other goods and services continue to get cheaper or have stagnated at best.

There are also plenty of other things that are different this time around.

For starters, this battle is far more global in its nature — especially because Europe is wrestling with its own massive problems.

Congress is free to ignore The Commission on Fiscal Responsibility's recommendations.

The U.S. is also much different than Japan in terms of its demographics, trade balance, financial system, savings rate, and position on the global stage.

And even the fact that the Fed remains extremely concerned about the risk of deflation represents a level of commitment that Japan’s policymakers lacked in the first few years after their crisis.

So What Should Stock Investors, and Anyone Else
Interested in Income, Make of All This Then?

First and foremost, I don’t think there’s any way to predict exactly how things will go from this particular point in history.

If anything, we simply need to continue watching the Fed’s moves vigilantly, as well as other developments around the globe, and adjusting our strategies accordingly.

But even if you assume that the U.S. economy will tread water for another ten years … that still doesn’t mean there won’t be plenty of money to be made in stocks.

After all, even during Japan’s 20-year market malaise there were individual shares that performed strongly.

Moreover, there were plenty of major market swings for investors to capitalize on with good timing.

Plus, if you started buying after the major implosion, you had a much better chance of making solid profits over the long term.

And if you were collecting dividends along the way, your total returns would have been even better!

All of those same things have held true during the past decade here in the States, where major stock indexes have basically gone nowhere.

So in the end, I continue to believe there are plenty of ways to make money with U.S. shares, whether your goal is long-term income or shorter-term capital gains, and whether the current environment is inflationary or deflationary.

Best wishes,

Nilus

Read more here:
Should U.S. investors fear a “Japan scenario?”

Commodities, ETF, Mutual Fund, Real Estate, Uncategorized

Should U.S. investors fear a “Japan scenario?”

December 7th, 2010

Nilus Mattive

With Ben Bernanke and the Federal Reserve now into their second round of quantitative easing, a lot of investors are becoming increasingly worried about the U.S. “becoming like Japan.”

In short, they’re starting to wonder whether the entire U.S. economy is entering stagnation so deep that all the money pumping in the world won’t get us out of it — the very same condition that Japan has been suffering with since the early 1990s.

I can see where the fear comes from, especially with Bernanke going on 60 Minutes two nights ago and saying things like,

“We’re not very far from the level where the economy is not self sustaining.”

And …

“It could be four, five years before we are back to a more normal unemployment rate.”

Bernanke even went so far as to suggest that the Fed may expand its current $600-billion program to purchase government bonds!

So today, I’d like to talk a little bit more about “Japan scenarios,” and whether stock investors should be concerned.

Let’s Start With a Little 1990s History …

Japan’s economic malaise began with twin bubbles — first in its stock market, which peaked in 1989, and then in real estate two years later.

Since then, the country’s overall debt levels have skyrocketed to more than twice the country’s GDP … its economic output has been rising less than 1 percent a year on average … and consumer prices have fallen in seven of the last ten years.

And all that has happened in spite of the fact that the Japan’s central bank has kept interest rates at or near zero for nearly a decade!

But what many folks don’t realize is that Japan’s zero-interest-rate policy was spurred on by none other than a group of U.S. academics, including a Princeton professor by the name of Ben Bernanke!

Sure, Japan had already been ratcheting rates down after its crisis began — and by 1996 they were well under 1 percent.

Ben Bernanke was one of the academics who told Japan to use zero interest rates and quantitative easing.
Ben Bernanke was one of the academics who told Japan to use zero interest rates and quantitative easing.

However, it was Bernanke who said Japanese policymakers were making a major mistake by not committing to keep interest rates at rock bottom for as long as it took for signs of growth to emerge.

Ultimately, officials listened to that advice … along with suggestions that they try other relatively experimental approaches such as “quantitative easing,” in which the central bank openly buys loans, securities and other assets.

For a few years it looked like a turnaround was coming, but those hopes were dashed by the recent global economic meltdown. And today, despite all its efforts, Japan is still waiting for a sustained rebound.

Today, Our Federal Reserve Has Gone from
Armchair Quarterback to Throwing Its Own Hail Marys

Ironically, Bernanke and his colleagues now find themselves trying many of the same tactics they once recommended to Japan.

And while there’s no way to know what would have happened without their massive intervention, I don’t think anyone would say they’ve had resounding success yet.

So is that it? Is it the endgame for the U.S. economy? Will deflation take hold?

What’s interesting this time around is that we’re seeing a huge divergence in prices.

Some things, especially commodities, have been rocketing higher and higher … and creating pockets of inflation.

Meanwhile, many other goods and services continue to get cheaper or have stagnated at best.

There are also plenty of other things that are different this time around.

For starters, this battle is far more global in its nature — especially because Europe is wrestling with its own massive problems.

Congress is free to ignore The Commission on Fiscal Responsibility's recommendations.

The U.S. is also much different than Japan in terms of its demographics, trade balance, financial system, savings rate, and position on the global stage.

And even the fact that the Fed remains extremely concerned about the risk of deflation represents a level of commitment that Japan’s policymakers lacked in the first few years after their crisis.

So What Should Stock Investors, and Anyone Else
Interested in Income, Make of All This Then?

First and foremost, I don’t think there’s any way to predict exactly how things will go from this particular point in history.

If anything, we simply need to continue watching the Fed’s moves vigilantly, as well as other developments around the globe, and adjusting our strategies accordingly.

But even if you assume that the U.S. economy will tread water for another ten years … that still doesn’t mean there won’t be plenty of money to be made in stocks.

After all, even during Japan’s 20-year market malaise there were individual shares that performed strongly.

Moreover, there were plenty of major market swings for investors to capitalize on with good timing.

Plus, if you started buying after the major implosion, you had a much better chance of making solid profits over the long term.

And if you were collecting dividends along the way, your total returns would have been even better!

All of those same things have held true during the past decade here in the States, where major stock indexes have basically gone nowhere.

So in the end, I continue to believe there are plenty of ways to make money with U.S. shares, whether your goal is long-term income or shorter-term capital gains, and whether the current environment is inflationary or deflationary.

Best wishes,

Nilus

Read more here:
Should U.S. investors fear a “Japan scenario?”

Commodities, ETF, Mutual Fund, Real Estate, Uncategorized

Oil Demand’s Triumphant Return

December 7th, 2010

Lost in the shuffle of the European debt woes, a second round of quantitative easing and gold’s record run has been the resurgence in global demand for oil. Global oil demand is strong; in fact, it has never been stronger. Oil demand during the third quarter of this year was up 3.7 percent, the fourth-straight quarter of growth.

Who’s behind this increase in demand? Emerging markets.

You can see from the chart that global oil consumption has bounced well off of early 2009 lows and now exceeds pre-crisis consumption levels. Consumption in the developed world, represented in the chart by the Organization for Economic Co-Operation and Development (OECD) countries, has been flat for the past 18 months and remains roughly 8 percent below 2007 levels.

While developed world demand has flatlined, emerging markets have captured a significant share of global oil consumption over the past three years—narrowing the usage gap between the two from roughly 12 million barrels per day in 2007 to 4 million barrels per day currently.

This week, Dr. Fatih Birol of the International Energy Agency presented his bullish long-term outlook for oil demand to analysts at Barclays, predicting that global energy demand will grow by 36 percent between 2008 and 2035. Birol says China and India will lead the way but the Middle East won’t be far behind.

He gave three reasons for the demand leadership of emerging markets: Economic growth, population increases and heavy fuel subsidies in many countries will give consumers a buffer from rising oil prices.

Chinese oil demand is expected to grow at the fastest rate of any country in the world at 10.4 percent this year. Figures on China’s share of global oil demand growth range between 25-40 percent but there’s no question that there is still substantial room for Chinese demand to grow.

Fabulous growth in auto demand will likely be the catalyst for China. Birol says that 700 out of every 1,000 people in the U.S. and 500 out of every 1,000 in Europe own cars today. In China, only 30 out of 1,000 own cars and Birol thinks that figure could jump to 240 out of every 1,000 by 2035.

When Japan hit $5,000 of GDP per capita, oil demand grew at a 15 percent annual rate for the next ten years, according to oil-industry consultant firm PIRA. It was a similar story for South Korea. China reached the $5,000 GDP per capita mark in 2007 but oil demand has only grown at a 7 percent compounded annual growth rate. This highlights China’s superior growth potential if China is to catch up to historical patterns.

Macquarie expects global oil demand to grow by 2.3 percent on a year-over-year basis in 2011, which the firm says would be met with drawdowns in oil stockpiles, higher prices and an OPEC response.

However, OPEC’s ability to control the oil market is in a precarious state. Ten of the cartel’s 12 countries will produce less oil in 2011 than they did in 2008, with Iraq and Nigeria the only countries expected to see production increases.

OPEC still controls 40 percent of the world’s oil supply but its spare capacity peaked in the early 1980s and is projected to fall an additional 2 million barrels per day in 2011, leaving the cartel with little ability to manipulate production as demand continues to grow.

Rising demand from emerging markets and a lack of maneuverability by OPEC should result in a very tight global oil market. We expect oil prices to continue trending upward throughout 2011.

Regards,

Frank Holmes,
for The Daily Reckoning

P.S. For more updates on global investing from me and the U.S. Global Investors team, visit my investment blog, Frank Talk.

Oil Demand’s Triumphant Return 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:
Oil Demand’s Triumphant Return




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

Oil Demand’s Triumphant Return

December 7th, 2010

Lost in the shuffle of the European debt woes, a second round of quantitative easing and gold’s record run has been the resurgence in global demand for oil. Global oil demand is strong; in fact, it has never been stronger. Oil demand during the third quarter of this year was up 3.7 percent, the fourth-straight quarter of growth.

Who’s behind this increase in demand? Emerging markets.

You can see from the chart that global oil consumption has bounced well off of early 2009 lows and now exceeds pre-crisis consumption levels. Consumption in the developed world, represented in the chart by the Organization for Economic Co-Operation and Development (OECD) countries, has been flat for the past 18 months and remains roughly 8 percent below 2007 levels.

While developed world demand has flatlined, emerging markets have captured a significant share of global oil consumption over the past three years—narrowing the usage gap between the two from roughly 12 million barrels per day in 2007 to 4 million barrels per day currently.

This week, Dr. Fatih Birol of the International Energy Agency presented his bullish long-term outlook for oil demand to analysts at Barclays, predicting that global energy demand will grow by 36 percent between 2008 and 2035. Birol says China and India will lead the way but the Middle East won’t be far behind.

He gave three reasons for the demand leadership of emerging markets: Economic growth, population increases and heavy fuel subsidies in many countries will give consumers a buffer from rising oil prices.

Chinese oil demand is expected to grow at the fastest rate of any country in the world at 10.4 percent this year. Figures on China’s share of global oil demand growth range between 25-40 percent but there’s no question that there is still substantial room for Chinese demand to grow.

Fabulous growth in auto demand will likely be the catalyst for China. Birol says that 700 out of every 1,000 people in the U.S. and 500 out of every 1,000 in Europe own cars today. In China, only 30 out of 1,000 own cars and Birol thinks that figure could jump to 240 out of every 1,000 by 2035.

When Japan hit $5,000 of GDP per capita, oil demand grew at a 15 percent annual rate for the next ten years, according to oil-industry consultant firm PIRA. It was a similar story for South Korea. China reached the $5,000 GDP per capita mark in 2007 but oil demand has only grown at a 7 percent compounded annual growth rate. This highlights China’s superior growth potential if China is to catch up to historical patterns.

Macquarie expects global oil demand to grow by 2.3 percent on a year-over-year basis in 2011, which the firm says would be met with drawdowns in oil stockpiles, higher prices and an OPEC response.

However, OPEC’s ability to control the oil market is in a precarious state. Ten of the cartel’s 12 countries will produce less oil in 2011 than they did in 2008, with Iraq and Nigeria the only countries expected to see production increases.

OPEC still controls 40 percent of the world’s oil supply but its spare capacity peaked in the early 1980s and is projected to fall an additional 2 million barrels per day in 2011, leaving the cartel with little ability to manipulate production as demand continues to grow.

Rising demand from emerging markets and a lack of maneuverability by OPEC should result in a very tight global oil market. We expect oil prices to continue trending upward throughout 2011.

Regards,

Frank Holmes,
for The Daily Reckoning

P.S. For more updates on global investing from me and the U.S. Global Investors team, visit my investment blog, Frank Talk.

Oil Demand’s Triumphant Return 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:
Oil Demand’s Triumphant Return




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

Danger of Deflation Depends on Your Definition of Deflation

December 6th, 2010

John Mauldin of Frontlinethoughts.com reports that “the number of people on food stamps continues to rise. As of the end of August, a total of 42,389,619 people were receiving food stamps under the SNAP program. This was an increase of 553,379 people over July’s number, or an increase month-over-month of 1.32%.” Most horrifically, “The year-over-year increase was 6,147,762 people or 17%.”

By this time, my heart is breaking from the sheer misery inherent in those numbers, and I am screaming in Loud Mogambo Outrage (LMO) at the damage caused by the Federal Reserve creating so much money for the last few decades that it created bubbles in stock markets, bubbles in bond markets, bubbles in the sizes of government, gargantuan derivatives markets and housing bubbles, all of which are in various stages of panic and loss, all made worse by more people not working and who can’t buy food!

And this does not even mention inflation in the prices of food and energy, which are going up in alarming rates, and I predict will go up Much, Much Higher (MMH) from here, as George Ure at UrbanSurvival.com reports that the energy input we have been receiving from the sun has been unusually low, with the results that “Since we had such a long-lasting solar minima recently, the winter this year is going to be unusually cold.”

I jumped into the conversation to make the witty remark that “So, besides losing wealth in our houses, unemployment at more than 10%, inflation in prices at 2.3% and rising alarmingly, we are also going to be freezing our butts off, too? Hahaha! Perfect! Thanks, Federal Reserve!”

Well, my little joke was a flop, and the “deafening silence” afterwards was embarrassing.

Perhaps my pathetic attempt at humor prompted Mr. Mauldin to relate the classic line where “President Clinton famously remarked about his escapades that ‘it all depends on the definition of what is is.’” Hahaha!

I always liked that particular historical fact, as it obviously proves that Bill Clinton is a lying, corrupt piece of useful-idiot socialist scum, and the fact that he is not in prison or an outcast in society says a lot about us.

I also laugh because I remember the actual time when he said it, and I had immediately used that famous line of Clinton’s with my boss, and said to her, “Hey! Hold on there, toots! It all depends on what your definition of ‘is incompetent’ is!”

Well, she did not laugh at my witty attempt to lighten the mood, and it actually seemed to outrage her all out of proportion, sort of like how inflation in prices makes me Go Freaking Nuts (GFN) because of the Federal Reserve creating so much money, and thus so much inflation in prices, and thus so much more misery for those who cannot increase their incomes, and especially for those who have no incomes at all.

It turns out that Mr. Mauldin was not merely making a joke, like me, but cleverly ties it into “similarly, whether or not we are in danger of deflation all depends on what your definition of deflation is.”

As witty as that is, I have to admit that I was sulking and purposely did not laugh at his little joke, which did not faze him at all. Instead, he went on, “First, let’s look at the recent headline numbers. What we find is that core inflation, at 0.6%, as well as trimmed inflation (which takes out the statistical outliers and anomalies) are both at post-war all-time lows.”

I know this is supposed to make me feel better, and that we are not, according to official government statistics, doomed to die of inflation in prices which will follow the outrageous inflations in the money supply by the Federal Reserve, although it does not explain how it is that now – for the first time in history – a gigantic inflation in the money supply will NOT be followed by a gigantic inflation in prices that has unforeseen and catastrophic consequences.

As proof, notice that Mr. Mauldin did NOT disavow the possibility of a hyperinflation in prices caused by a hyperinflationary increase in the money supply by the Federal Reserve creating such unbelievable amounts of money so that everyone is bankrupted and the whole economy is destroyed such that only cannibals and cigarette vendors survive, except those holding gold and silver, who have all moved to Hawaii and are having a wonderful, wonderful time consuming everything they see and having a lot of fun..

Well, I am sorry to say that it doesn’t make me feel better, perhaps because I am a paranoid cynic who is sure that all government statistics are lies and all government workers are out to hurt me, if not kill me, the most recent evidence being that my lawn sprinkler, that has lasted all these months, was apparently deliberately tampered with by a person or persons unknown, so that when I picked it up by the attached hose the other day, it broke off! Snap!

I can take some comfort that Mr. Mauldin seems a lot less paranoid and suspicious than I am, and is probably more lightly armed than I am, although he is a lot smarter than me and can see things I don’t see, but to me the fact that official inflation figures being at more than a scary 2% can still be the lowest inflation in 65 years means that we have constantly had persistent, corrosive, debilitating inflation in prices, and higher than 2.3%, for the last 65 years!

Thus, thanks to the foul Federal Reserve, we have constantly been suffering from inflation in prices, which brings up, because it must, a truism from a recent translation of one of the mysterious runes of the Ancient Mogambo Scrolls (AMS), which is “Buy gold and silver when thy government allows the manufacture of excess fiat money. To do otherwise is to be but a pathetic dimwit and a moron, such as the lowly donkey or burro, but without the carrying capacity, and a lot more bitchy.”

There is, at this stage of translation of the ancient texts, no mention of the term, “Whee!” in relation to how easy it is to buy a few ounces of gold or silver (“Here’s my money, put the metal in my hand!”), but there ought to be, and probably will be, knowing Mogambo like I do.

And even if not, “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning

Danger of Deflation Depends on Your Definition of Deflation 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:
Danger of Deflation Depends on Your Definition of Deflation




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

Will Year-End Tax-Loss Selling Have an Impact on Gold, Silver Investors?

December 6th, 2010

What has been completely overlooked or not mentioned during this sizable run up in stock market profits, including the precious metals sector, is the imminent advent of tax-loss selling. Every year around this time, as sure as snow falls in Vermont, more than ever, there are reasons why this unmentioned event is apt to at least modestly affect stocks before the year end, especially precious metals. Gold has risen over 18%, silver has shown a rise above 50% on the year. Price are reaching new highs, but can they be maintained? I believe we may see more volatility as a breakout on GLD must be monitored especially as investors who have made impressive gains may decide to take profits before the end of the year. The reasons for this are manifold. Tax-loss selling is an annual event. It takes on added significance in that investors have the shadow of increased taxation looming ominously. So tax-loss selling is apt to be more severe, in view of the possibility that the Fed has already murmured that there may be a tax increase. Not to worry they say, the Fed will try to make it “gradual.”

Already the Debt Reduction Commission is on record as citing the need to increase taxes and saying they agree with the bold steps to save the economy. In 2009, China has dealt with imported inflation from the eurozone and the United States which have both had to essentially print money to save the markets. Both currencies came under pressure this year as investors fled to precious metals. The US and European economies are weakening with high unemployment yet food costs and hard assets are soaring. This current economic situation could exacerbate, affecting the quality of life for many. Right now we are in the midst of a euphoric period reminiscent of the phrase “happy days are here again.” Oddly enough the rosy news is occurring smack in the middle of the holiday season. Do not be misled: tax-loss selling will occur as investors rethink 2011 and the investment challenges ahead.{FLIKE}A most important factor that is occurring as 2010 winds down and 2011 looms is that the Federal Reserve Board is launching a full-on offensive on the American economy called QE2, impacting every household. This action is a latter-day version of the Battle of the Bulge in World War II. The bulge is not in the average citizen’s pocket; it’s in how much it’s going to cost global investors and their portfolios. QE2 is nothing more than a metaphor for the profligate printing of dollars. We can not avoid this having a significant effect on every one of us; it will prompt many to take profits now in 2010 as the price of gold challenges new highs. Many have large profits, and investors should be aware year-end profit taking.

In 2009, GLD moved from a low of approximately $80 a share to $120. In December of 2009, we saw some profit-taking without any warnings except extremely overbought readings. Be careful as this recent break to new highs has not shown much enthusiasm. Most of the excitement has been in silver, uranium, and some top-quality junior miners.

Read more here:
Will Year-End Tax-Loss Selling Have an Impact on Gold, Silver Investors?

Commodities

How to Be Self-Reliant in the Age of Turmoil

December 6th, 2010

We have entered what I call the Age of Turmoil, a time that is marked by rapid change and fluctuating crises. The old system of debt and consumption that gave us great salaries, generous benefits, stock market and housing appreciation, and a high standard of living is gone forever.

What’s happening right now is a major sea change: the game is being reset, and the rules are being rewritten.

I’m not being pessimistic, and this is not a cause for fear. We shouldn’t be afraid of the Age of Turmoil, but rather prepare for it by becoming more self-reliant. Those who are prepared will survive, thrive, and be well-positioned for the enormous opportunities that await.

Conversely, those who cling to their faith in the old system, desperately hoping for a return to the carefree days of the past, will have their lives turned upside down.

This is because all the major elements of the old system – our political process, our money and financial institutions, the job market, police forces, etc. – only function as long as the system is operating normally.

Think about how things work under the old system – people are effectively given pre-packaged options for the major decisions in their lives. Do you want to be a doctor? Follow this career template. A pilot? Follow that one. Investing your money? Select from these mutual funds.

I call these “limiting choices,” and they are a staple tradition in our modern society. Our realities are defined by people and regulations which govern our thinking, restrict our options, and constrain our creativity.

When you walk into a bank, for example, no one is going to sit down with you and say, “Hey I think you should protect yourself from a depreciating currency, let’s talk about gold allocation and taking some options in the renminbi.”

No, instead you get two limiting choices that are jammed down the throats of millions of customers: the generic savings account, or the generic checking account.

Even the political process is full of limiting choices. How many times have you gone to the polls and been forced to decide between two equally vapid, insipid candidates? In the end, you vote for the limiting choice who is “less bad,” the lesser of two evils.

These limiting choices work just fine as long as the system is functioning properly…they’re efficient and help maintain order. Human nature is such that most people abdicate the power of choice in their lives, and limiting choices provide basic direction, making it easy to follow the herd.

The trouble is, limiting choices are not designed to help you survive when the system collapses.

Limiting choices like the standard career template of racking up huge university debt, or investing in index funds, or holding cash in a savings account, or relying on social security, etc. were all successful tactics over the last 20 years. In the Age of Turmoil, they’ve become destructive.

As soon as confidence cracks and the system starts to fail, everything unwinds…and people whose realities are defined by limiting choices will have their lives turned upside down.

The way out, the way to survive and thrive in this turmoil, is to reject limiting choices and define your own reality through what I call universal choice. In fact, I consider “defining your reality” to be the first pillar in achieving self-reliance in the Age of Turmoil.

This entails being actively engaged in the major problems and decisions we face in life, and developing the independent mindset to design our own paths from an entire universe of possibilities, not just limiting choices.

Planting multiple flags is a great example of cultivating this independence and defining your own reality. Instead of the limiting banking choices provided by your hometown bank, you can open a foreign bank account in alternative currencies, or store gold in a private vault overseas.

Instead of the limiting investment choices provided by your broker for standard blue chip stocks and index funds that have yielded negative returns for a decade, you can invest in alternative assets like foreign companies or international real estate based on out of the box trends that you identify.

Instead of limiting career choices provided by the guidance counselor that will result in massive student loan debt and little else, you can learn valuable skills that solve people’s problems, or head to thriving economies overseas looking for more interesting opportunities and adventures.

The key theme in defining your reality is to think creatively beyond the limiting choices that the old establishment puts in front of you. In fact, when you consider many of the world’s greatest historical figures, the main factor they all shared was a common rejection of limiting choices.

People like the Wright Brothers, Gandhi, Bill Gates, and Ayn Rand all dismissed convention and defined their realities based on possibilities that they conceived. I’m absolutely convinced that the greatest outcomes await those who can take this step.

Regards,

Simon Black
for The Daily Reckoning

How to Be Self-Reliant in the Age of Turmoil 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 Be Self-Reliant in the Age of Turmoil




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, OPTIONS, Real Estate, Uncategorized

The Fed’s Misguided Beliefs About Currency Debasement

December 6th, 2010

What does it mean?

30-Year Treasury Yield vs. 30-Year Mortgage Rates

The chart above shows that the 30-year Treasury bond yield is now higher than the interest rate on 30-year mortgages.

What does it mean?

The answer is not immediately apparent. On the surface, this chart indicates that the average American mortgage-holder is a better credit risk than the US government. After digging a little deeper, the picture doesn’t change very much. The average American mortgage-holder is genuinely trying to repay his debts. The US government isn’t.

Treasury bonds remain the global benchmark for safety and reliability. But at the same time, Federal Reserve Chairman, Ben Bernanke, is busy establishing a new global benchmark for dumb ideas. He is busy printing up dollars in the name of dollar stewardship.

The man considers it a good idea to sacrifice the dollar’s hard-won reputation in the pursuit of a lower unemployment rate. He considers it prudent to exchange America’s world-leading credit-worthiness for short-term economic benefits.

But the global economy does not operate according to the wacky theories of academia. It follows the common sense principles of the real world. Chairman Bernanke does not seem to grasp the fact that the Federal Reserve does not create jobs; the private sector does.

Nevertheless, last night on 60 Minutes, Bernanke defended his quantitative easing campaign as an essential assault against unemployment.

“At the rate we’re going,” said the Chairman, “it could be four, five years before we are back to a more normal unemployment rate.” Therefore, Bernanke continued, additional quantitative easing is “certainly possible… It depends on the efficacy of the program.”

In other words, the Chairman will continue to debase the dollar for as long as it takes to revive economic growth…or to destroy it. According to the academic theories that Bernanke embraces, the Federal Reserve can stimulate the economy by printing dollars and buying Treasury bonds, thereby lowering interest rates…and facilitating capitalistic ventures.

In the real world, however, currency debasement is just that, currency debasement…which is just a form of wealth destruction. And notwithstanding Ben Bernanke’s theories, destroying wealth never creates it.

Bernanke believes he is waging a war against economic malaise and unemployment. Unfortunately, his arsenal features a falling dollar and a rising inflation rate.

These dynamics are not lost on bond investors…or at least not completely lost. Yields on long-term Treasury securities have been climbing since August. Last week, the 10-year T-note yield pushed above 3.0% for the first time in months. 30-year bond yields have also been climbing.

So Bernanke’s tactics are working, right? Hardly.

The economy added a paltry 39,000 jobs in November, as the unemployment rate jumped to 9.8 percent, the highest level since April.

So if you’re keeping score at home, it’s…

Bad Economy: One

Dumb Ideas: Zero

Eric Fry
for The Daily Reckoning

The Fed’s Misguided Beliefs About Currency Debasement 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 Fed’s Misguided Beliefs About Currency Debasement




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

Uncategorized

The Fed’s Misguided Beliefs About Currency Debasement

December 6th, 2010

What does it mean?

30-Year Treasury Yield vs. 30-Year Mortgage Rates

The chart above shows that the 30-year Treasury bond yield is now higher than the interest rate on 30-year mortgages.

What does it mean?

The answer is not immediately apparent. On the surface, this chart indicates that the average American mortgage-holder is a better credit risk than the US government. After digging a little deeper, the picture doesn’t change very much. The average American mortgage-holder is genuinely trying to repay his debts. The US government isn’t.

Treasury bonds remain the global benchmark for safety and reliability. But at the same time, Federal Reserve Chairman, Ben Bernanke, is busy establishing a new global benchmark for dumb ideas. He is busy printing up dollars in the name of dollar stewardship.

The man considers it a good idea to sacrifice the dollar’s hard-won reputation in the pursuit of a lower unemployment rate. He considers it prudent to exchange America’s world-leading credit-worthiness for short-term economic benefits.

But the global economy does not operate according to the wacky theories of academia. It follows the common sense principles of the real world. Chairman Bernanke does not seem to grasp the fact that the Federal Reserve does not create jobs; the private sector does.

Nevertheless, last night on 60 Minutes, Bernanke defended his quantitative easing campaign as an essential assault against unemployment.

“At the rate we’re going,” said the Chairman, “it could be four, five years before we are back to a more normal unemployment rate.” Therefore, Bernanke continued, additional quantitative easing is “certainly possible… It depends on the efficacy of the program.”

In other words, the Chairman will continue to debase the dollar for as long as it takes to revive economic growth…or to destroy it. According to the academic theories that Bernanke embraces, the Federal Reserve can stimulate the economy by printing dollars and buying Treasury bonds, thereby lowering interest rates…and facilitating capitalistic ventures.

In the real world, however, currency debasement is just that, currency debasement…which is just a form of wealth destruction. And notwithstanding Ben Bernanke’s theories, destroying wealth never creates it.

Bernanke believes he is waging a war against economic malaise and unemployment. Unfortunately, his arsenal features a falling dollar and a rising inflation rate.

These dynamics are not lost on bond investors…or at least not completely lost. Yields on long-term Treasury securities have been climbing since August. Last week, the 10-year T-note yield pushed above 3.0% for the first time in months. 30-year bond yields have also been climbing.

So Bernanke’s tactics are working, right? Hardly.

The economy added a paltry 39,000 jobs in November, as the unemployment rate jumped to 9.8 percent, the highest level since April.

So if you’re keeping score at home, it’s…

Bad Economy: One

Dumb Ideas: Zero

Eric Fry
for The Daily Reckoning

The Fed’s Misguided Beliefs About Currency Debasement 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 Fed’s Misguided Beliefs About Currency Debasement




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

VIX Put Matrix Offers Glimpse of Expected Future

December 6th, 2010

In yesterday’s, Chart of the Week: VIX Support, I made a statement that several readers have had some difficulty putting their arms around.

Specifically, I noted:

“VIX puts are extremely inexpensive right now and one can actually buy VIX puts for March, April and May of 2011 for less than half the price of what the December 2010 puts are currently being offered.”

This strange, but true phenomenon arises because of the confusion over the underlying for VIX options. At the moment VIX options expire, the underlying for the options is indeed the cash/spot VIX. Prior to expiration, however, the appropriate underlying to focus on is the VIX futures. With the VIX currently at about 18 and the VIX futures for the middle of 2011 approximately 50% higher at 27, the VIX futures term structure actually reflects a different underlying for each month of VIX options and futures.

The graphic below summarizes some of the consequences of the steep VIX futures term structure for VIX options. By means of illustration, note that the VIX December 18 puts can be bought for 0.85. The same puts in for March, April or May 2011, however, can be purchased for less than half that price, as I noted yesterday. The explanation is simple: when investors expect the VIX to be at 27, the VIX 18 puts are going to be a lot cheaper than when the VIX is at 18.

For comparison purposes, refer to a similar VIX put matrix from April 2009 that appeared in Selling VIX Puts with the Help of a VIX Put Matrix. At that time, stocks had formed a major bottom the previous month and the consensus expectation was that volatility would be on the decline. For this reason, with the VIX at 34.82, any puts that were “in the money” (in terms of the cash/spot VIX, not vis-à-vis the VIX futures) were more expensive the farther one goes out in time.

With VIX options, the key ingredients are almost always the VIX futures term structure and what it implies about mean reversion expectations.

Related posts:


[source: optionsXpress.com]
Disclosure(s): neutral position in VIX via options at time of writing



Read more here:
VIX Put Matrix Offers Glimpse of Expected Future

OPTIONS, Uncategorized

Lessons and Levels to Watch on Bank of America BAC

December 6th, 2010

Bank of America has been in the news lately, and it’s one of the major financial companies that’s underperfoming its peers in the financial sector.

Let’s start with the Weekly Chart and then drill down to the Daily Chart to look at possible opportunities, levels, and lessons.

BAC Weekly:

If we cut through the noise and focus on price, we see that BAC stock is in a weekly chart downtrend, having made lower lows, lower highs, and the 20/50 EMA structure is clearly bearish.

Ok, given the downtrend, there’s a key level to watch right here that could result in a short-term move – or at least pause/consolidation of the trend.  IF NOT, then it’s down to lower levels.

For now, let’s focus on the $11.00 per share level, which is the 50% Fibonacci Retracement as drawn off the 2009 low to the 2010 high.

Sometimes price stops on the half-way point during a retracement – but if price does not hold here, then a breakdown sharply under $11 targets the 61.8% Fibonacci level at $9.15.

For additional reference, the falling 20 week EMA rests at $12.68, which will come in shortly when we look at the daily chart.

Keep this weekly structure and simple levels in mind as we drop to the daily chart.

Throwing volume and the 3/10 Oscillator into the mix, we still see a persistent downtrend in price (lower lows, lower highs, and a bearish EMA orientation).

Again, for the moment, sellers have to battle buyers here who are playing for a bounce off support at the $11 level… and so far, the buyers have pushed price near the $12.00 level.

Here’s where watching what happens next comes into play.  There’s a positive divergence from the 3/10 Oscillator (bullish) but there’s overhead confluence resistance at the $12 per share level.

Why?

The 50 day EMA rests solidly at $12.08, and the August price swing low rests at $12.16.  As I mentioned on the weekly chart, the 20 week EMA is slightly above here at $12.68.

Finally, there’s a prior swing high – an immediate target if buyers break above the $12 level – at $12.73.

So, for short-term traders, expect a possible target of $12.70 if buyers break stock sharply above $12 soon.

Otherwise, look for $12 to be the key short-term level that divides bulls and bears – buyers and sellers.

The $11 level still is a strong support zone – quite strong actually – but if sellers take over, the next target then becomes the $9.00 level.

Use this as an example of multi-timeframe level analysis as well as objective, non-biased “IF/THEN” scenario formulation depending on what happens – and thus what targets to expect – as buyers and sellers ‘battle’ to hold or break a key/important price level.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Read more here:
Lessons and Levels to Watch on Bank of America BAC

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Investing in India: Optimism in the New New World

December 6th, 2010

We arrived at the Oberoi Hotel in Mumbai after President Obama had left.

As we were leaving, President Sarkozy was arriving.

It is a Grand Hotel. They come. They go. Nothing ever changes.

One of the problems with traveling so much is that you spend much of your time in a jet-lag fog. It was hazy when we left Mumbai. It is hazy in Kuala Lumpur. Was it the weather…or us?

But when we read the news, our eyes opened wide. Friday’s jobless numbers were shocking.

The latest figures show unemployment increasing, not going down. Here’s the New York Times write-up:

The United States added a total of just 39,000 jobs last month, down from an upwardly revised gain of 172,000 in October, the Labor Department reported on Friday. With local governments shedding jobs, the additions in the private sector were too small to reduce the ranks of the unemployed or even to keep pace with people entering the work force.

The unemployment rate, which is based on a separate survey of households, rose to 9.8 percent in November. It was the highest jobless rate since April and up from 9.6 percent in October.

The outlook remains bleak. More than 15 million people are out of work, among them 6.3 million who have been jobless for six months or longer. Many are about to exhaust their unemployment benefits, which have been extended repeatedly by the government because of the severity of the downturn.

The latest snapshot of the labor market cast a pall over what had been a brightening picture of a steadying economy.

The stock markets shrugged off the report, which was well shy of the forecast for a gain of 150,000 jobs, as all the major indexes rose slightly on Friday.

Part of the surprise in the November report was that layoffs, which had subsided earlier this year, picked up again. The number of people who were unemployed because they had been laid off or had concluded a temporary assignment increased by 390,000.

We don’t want to rub it in. But “we told you so” springs to the lips like a cup of beer to a football fan.

Meanwhile, the housing market is weakening. The Case Shiller index shows prices in such hot-spots as Phoenix and Las Vegas, at the lower part of the market, down by more than 40% – and still dropping. Some of them are now below their levels of 10 years ago.

So how can you have a real recovery when…

A) Fewer people have jobs (less household income)?
B) The average household’s major asset is losing value?

But heck, this is fantasyland now. Anything can happen. The feds are bailing out the banks all over the world…and entire countries, too.

Investors actually bid up stocks slightly even after the employment news.

The Dow rose 19 points on Friday.

Gold rose $16.

“What would you recommend to our viewers,” asked a Bloomberg reporter in Mumbai yesterday.

“Well, I don’t make recommendations,” we replied. “Especially not to Indians.

“But there are some periods and some places when it makes sense to be positive and optimistic…and there are times and places when it doesn’t.

“If you’re an Indian investor, I think you can be generally positive about the financial future. Yes, there are bound to be more crises…more corruption scandals…and more disasters. But there’s a trend going on that is probably too big to stop. It’s regression to the mean. India is catching up with the West. Wages are growing at maybe 15% per year. The stock market goes up almost every year. And many companies – in terms of growth – are still very cheap.

“The population is growing fast. The economy is growing fast. There’s plenty of capital for investment. There is plenty of knowledge and skill. There is no reason why this growth can’t continue for many, many years…

“So, an Indian investor can be optimistic. He should be optimistic. He should want to own a piece of that growth…a piece of the future.

“Alas, the situation is very different in the developed world…especially in the USA.

“The US and Europe are struggling just to stay in the same place. They’re mature societies…with populations that are getting old and economies that are largely worn out. In Europe this year, for the first time ever, more people will retire than join the workforce. And in America, the Social Security fund, for the first time ever, will pay out more than it takes in. These are two major developments. They signal the beginning of the end.

“I saw in the paper that China just set a new record with a passenger train that goes 300 mph. But almost all records are being broken – and they’re being broken in China or another ‘emerging’ market. The biggest, the most, the fastest…it’s all happening. But it’s not happening in the old, developed world.

“I think it was Karl Lagerfeld who noticed that Asia today is the New World. America and Europe are now part of the Old World.”

Bill Bonner
for The Daily Reckoning

Investing in India: Optimism in the New New World 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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Investing in India: Optimism in the New New World




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

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