Uncontrollable obligations

As various people bask in the economic “recovery” based on the third quarter GDP report, there is little reason for optimism. Banks are filled with toxic assets that are being covered up temporarily but will not go away quietly. Derivatives, estimated at over $600 Trillion hang over the economic world by a frayed thread. Infrastructure requires enormous expenditures to just bring it up to standard after decades of neglect.
And then there is the pension problem which few people talk about. No, not the social security pension problem. All other pensions. Many private pensions are underfunded, virtually all public pensions are. Both are trains coming down the tracks to which taxpayers are tied. Public pensions are the bigger problem, by far. Part of the public pension problem comes from what is known as “gaming the system.” Unlike the private sector, the public sector has every incentive to “kick the can down the

The balance of power

For the first time in recent years, voters trust Republicans more than Democrats on all 10 key electoral issues regularly tracked by Rasmussen Reports. The GOP holds double-digit advantages on five of them.

As a libertarian I have equal distrust for all political parties, but this report is quite telling in what it could mean for the balance of power in Congress come the next general election.

Here’s some more from the report:

• Republicans have nearly doubled their lead over Democrats on economic issues to 49% to 35%, after leading by eight points in September.
• On the highly contentious issue of health care, voters now give the edge to Republicans 46% to 40%. The parties tied on the issue last month, after Republicans took the lead on it for the first time in August.
• Most voters (54%) oppose the health care reform plan proposed by the president and congressional Democrats, but 42% are in favor of it.
• On taxes, Republicans are now ahead of Democrats 50% to 35%, nearly doubling their September lead on the issue. Prior to July, the percentage of voters who trusted the GOP more on taxes never reached 50%. It has done so three times since then.

Dollar decline draws international protest

“Some sort of crisis is looking inevitable,” said Neil Mellor, a currencies analyst at the Bank of New York Mellon in London. “You can’t continue down this road without something giving way, and it’s clear that the U.S. is not going to do anything to put meat on the bones of its strong-dollar policy.”

LONDON — This could end up being viewed as the week when dollar weakness became too much for the rest of the world to bear, setting the scene for tense encounters at the upcoming meeting of finance ministers from the world’s 20 largest economies.
Brazil has now imposed a tax on some foreign-exchange inflows. The Bank of Canada has cranked up its negative tone on the strength of the Canadian dollar. And a whole slew of European officials have practically begged the U.S. to step in and boost the buck.
This chorus of pain marks a rise in international pressure on the U.S. to live up to its oft-quoted “strong-dollar policy,” after central banks in South Korea, Taiwan, the Philippines, Thailand, Indonesia and Hong Kong all stepped in to weaken their currencies against the greenback earlier this month.
Now, the G20 meeting scheduled for Nov. 6-7 in Scotland will offer a perfect forum for such concerns over dollar weakness to be aired.
“I think there will be fireworks at the G20,” said Stephen Jen, a well-respected currencies investor at hedge fund BlueGold Capital Management in London. “The G20 has such diverse membership” that disagreement over how to handle the dollar’s decline is very likely, he added.
When measured against a basket of currencies from the U.S.’s trading partners, the dollar is now only around 7% above its lowest point since 1971. The greenback has recently hit some notable lows against a range of currencies, with the euro briefly nudging $1.50 Wednesday.
“Some sort of crisis is looking inevitable,” said Neil Mellor, a currencies analyst at the Bank of New York Mellon in London. “You can’t continue down this road without something giving way, and it’s clear that the U.S. is not going to do anything to put meat on the bones of its strong-dollar policy.”
The strain is certainly starting to show. Most countries would greatly prefer to see their currencies weaken, because it makes their exports appear cheaper — a boost when economies are edging out of the global downturn. Instead, many currencies are climbing, not necessarily because of domestic factors, but because the dollar is sliding as newly optimistic investors pull funds out of the greenback, to which they had turned as a safe haven in deeply troubled times.
Brazil’s government took action Tuesday, slapping a 2% tax on foreign purchases of bonds and shares in a direct effort to rein in the Brazilian real, which has risen by nearly 31% against the dollar since March.
The new tax rule sent some investors scurrying for the exits and immediately shoved the dollar 3.75% higher against the real in just one day — a very substantial single-day move in the currency markets.
Currencies watchers are divided about the likely long-term impact of Brazil’s move. Some think that with bumper returns still lying ahead in Brazilian assets, many investors will stick with the country, pushing the currency still higher. The Institute of International Finance has estimated that capital flows into emerging markets will almost double from 2009 to 2010.
David Lubin, an emerging-markets economist at Citigroup in London, said Wednesday that he sees little chance of countries in Central and Eastern Europe adopting similar measures, although he cautioned that investors should “never say never.”
But skeptics, fearing a potential dollar rout, aren’t so sure. “I take the move as a real statement of intent. This could be the thin end of the wedge. There’s a crunch coming, and the only route is the Brazilian route — I think we will see more moves like this,” said Mr. Mellor at The Bank of New York Mellon.
Some authorities around the world are more sanguine about dollar weakness, with the Reserve Bank of New Zealand Governor Alan Bollard stating this week that the strength of the New Zealand dollar was no impediment to raising interest rates.
However, Brazil is not alone. Canada’s central bank warned Tuesday that persistent strength and volatility in the Canadian dollar could “more than fully offset” other encouraging developments seen in the Canadian economy since July.
The market read this as an indication that intervention to weaken the Canadian dollar could be close to hand, prompting traders to push the U.S. dollar nearly 2% higher against its neighboring currency.
Finally, European officials were particularly forthright this week. French Finance Minister Christine Lagarde said Tuesday that “we want a strong dollar; we need a strong dollar.” A senior advisor to French President Nicolas Sarkozy also said that “the euro at $1.50 is a disaster for the European economy and industry.” Currency traders, however, decided to ignore these words.
That’s because few see a real prospect for a successful unilateral program of intervention in the euro zone. Particularly in the case of this heavily traded currency pair, U.S. involvement in a joint effort to sell euros is seen as crucial, because such large sums would be needed to push the rate around. Intervention programs involving just one country are rarely successful.
For its part, the U.S., publicly favors a strong-dollar policy, mindful that the world’s largest economy relies heavily on the goodwill of foreign investors buying its dollar-denominated bonds. However, U.S. Treasury Secretary Timothy Geithner appeared to soften this stance last month, when he indicated that a U.S. transition towards a heavier reliance on exports would be “healthy” and “necessary.” Naturally, a weaker dollar would help in that process.
In the end, most experts agree that unless the dollar’s decline becomes much more rapid, or unless it provokes a rush away from U.S. government bonds — both unlikely prospects at this point — then the U.S. authorities will continue to stand by and let the buck fall.

Inflation was supposed to lower unemployment

Allan Meltzer is a renowned Monetarist and academic economist. His discussion below of current economic policy and interest rates is important reading. He succinctly captures the issues, discusses the dangers of continuation of current policies and probable outcomes. Emphasis has been added by me.

The United States is headed toward a new financial crisis. History gives many examples of countries with high actual and expected money growth, unsustainable budget deficits, and a currency expected to depreciate. Unless these countries made massive policy changes, they ended in crisis. We will escape only if we act forcefully and soon.
As long ago as the 1960s, then French President Charles de Gaulle complained that the U.S. had the “exorbitant privilege” of financing its budget deficit by issuing more dollars. Massive purchases of dollar debt by foreigners can of course delay the crisis, but today most countries have their own deficits to finance. It is unwise to expect them, mainly China, to continue financing up to half of ours for the next 10 or more years. Our current and projected deficits are too large relative to current and prospective world saving to rely on that outcome.
Worse, banks’ idle reserves that are available for lending reached $1 trillion last week. Federal Reserve Chairman Ben Bernanke said repeatedly in the past that excess reserves would run down when banks and other financial companies repaid their heavy short-term borrowing to the Fed. The borrowing has been repaid but idle reserves have increased. Once banks begin to expand loans or finance even more of the massive deficits, money growth will rise rapidly and the dollar will sink to new lows. Do we have to wait for a crisis before we replace promises with effective restraint?
Many market participants reassure themselves that inflation won’t come by noting the decline in yields on longer-term Treasury bonds and the spread between nominal Treasury yields and index-linked TIPS that protect against inflation. They measure expectations of higher inflation by the difference between these two rates, and imply long-term investors aren’t demanding higher interest rates to protect themselves against it. But those traditional inflation-warning indicators are distorted because the Fed lends money at about a zero rate and the banks buy Treasury securities, reducing their yield and thus the size of the inflation premium.
Further, the Fed is buying massive amounts of mortgages to depress and distort the mortgage rate. This way of subsidizing bank profits and increasing their capital bails out these institutions but avoids going to Congress for more money to do so. It follows the Fed’s usual practice of protecting big banks instead of the public.
The administration admits to about $1 trillion budget deficits per year, on average, for the next 10 years. That’s clearly an underestimate, because it counts on the projected $200 billion to $300 billion of projected reductions in Medicare spending that will not be realized. And who can believe that the projected increase in state spending for Medicaid can be paid by the states, or that payments to doctors will be reduced by about 25%?
While Chinese government purchases of our debt may delay a dollar and debt crisis, they also delay any effective program to reduce the size of that crisis. It is far better to begin containing the problem before we blow a hole in the dollar and start another downturn.
A weak economy is a poor time to reduce current government spending or raise tax rates, but we don’t require draconian immediate changes. We do need a fully specified, multi-year program to restore fiscal probity by reducing spending, and a budget rule that limits the size and frequency of deficits. The plan should be announced in a rousing speech by the president. The emphasis should be on reducing government spending.
The Obama administration chooses to blame outsize deficits on its predecessor. That’s a mistake, because it hides a structural flaw: We no longer have any way of imposing fiscal restraint and financial prudence. Federal, state and local governments understate future spending and run budget deficits in good times and bad. Budgets do not report these future obligations.
Except for a few years in the 1990s, both parties have been at fault for decades, and the Obama administration is one of the worst offenders. Its $780 billion stimulus bill, enacted earlier this year, has been wasteful and ineffective. The Council of Economic Advisers was so pressed to justify the spending spree that it shamefully invented a number called “jobs saved” that has never been seen before, has no agreed meaning, and no academic standing.
One reason for the great inflation of the 1970s was that the Federal Reserve gave primacy to reducing unemployment. But attempts to tame inflation later didn’t last, and the result was a decade of high and rising unemployment and prices. It did not end until the public accepted temporarily higher unemployment—more than 10.5% in the fall of 1982—to reduce inflation.
Another error of the 1970s was the assumption there was a necessary trade-off along a stable Phillips Curve between unemployment and inflation—in other words, that more inflation was supposed to lower unemployment. Instead, both rose. The Fed under Paul Volcker stopped making those errors, and inflation fell permanently for the first time since the 1950s.
Both errors are back. The Fed and most others do not see inflation in the near term. Neither do I. High inflation is unlikely in 2010. That’s why a program beginning now should start to lower excess reserves gradually so that the Fed will not have to make its usual big shift from excessive ease to severe contraction that causes a major downturn in the economy.
A steady, committed policy to reduce future inflation and lower future budget deficits will avoid the crisis that current policies will surely bring. Low inflation and fiscal prudence is the right way to strengthen the dollar and increase economic well being.
Mr. Meltzer is professor of political economy at Carnegie Mellon University and the author of the multi-volume “A History of the Federal Reserve” (University of Chicago, 2004 and 2010).

Valuation multiples against earnings

John Hussman is an astute observer of markets. Currently, he is very concerned about overbought conditions.

That said, investors clearly are approaching the current market with every belief that the extreme valuations of 2007 represent the sustainable norm to which stocks should return. This despite the fact that the 2007 peak reflected rich valuation multiples against earnings that were themselves inflated by abnormally elevated profit margins. Last week, Bill Hester reviewed the evidence that forward earnings estimates presently assume a return to record profit margins observed just before the market turned down. If the expectations of investors and analysts are heavily anchored to those 2007 levels, as seems to be the case at present, then the fact that stocks are richly valued on the basis of sustainable, normalized earnings and cash flows may not be sufficient to give investors pause.

Some of the solutions facing the economy

oreover, businesses have little reason to hire already because of massive overcapacity. Add increasing health care costs to the list of reasons for businesses not to hire.
Given that government spending crowds out private investment, these policies all but assures that unemployment is going to remain high for a long time as noted in Structurally High Unemployment For A Decade.
Killing The Goose
Last week in Thoughts on the Economy: Problems and Solutions I listed the problems and some of the solutions facing the economy. It was a discussion between John Mauldin and I about his weekly E-Letter Killing The Goose.
John and I agreed on many, but not all solutions. I would also like to add something I have proposed before, killing the Davis-Bacon prevailing wage act.
Muddle Through Where Art Thou?
Back in 2002, the usually optimistic Mauldin proposed the economy would somehow manage to “Muddle Through”.
However, because of the unsustainable path we are on. John has changed his mind. Please consider these excerpts from Muddle Through, R.I.P?
I defined a Muddle Through Economy in the past as one of slow growth (in the area of 1-2%) and a slack employment environment, such as we had in 2002 and the early part of 2003. In early 2007, I suggested we would return at some point to such an environment at the end of the recession I was predicting.
However, gentle reader, never in my wildest dreams did I think we could be
looking at government deficits of $1.5 trillion dollars and actually budgeting future
deficits of over $1 trillion as far as the eye can see. And there is real reason to think that under current plans, $1 trillion deficits are optimistic.

Reserve currency is teetering on a precipice

Not much to disagree with here, at least in the intermediate to long-term. If we have a market correction in the US, which seems almost inevitable, then the whole world will be affected including, if not especially China. There is much not to like short-term in China — the banking systems, centrally-directed economy (when they make mistakes they tend to be doozies), dependence on US for exports, coming currency adjustments, etc. Despite these near-term concerns, I am in agreement with the article. Just don’t “double-down” right now.

Jim Rogers on the Next 10 Years 

By Heather Bell
I’m moving to China … possibly to live in a bunker. At least that was my inclination after listening to a presentation by Jim Rogers Thursday.
Now don’t get me wrong―Mr. Commodities wasn’t all doom and gloom. In fact, his talk was both informative and highly entertaining. But Rogers doesn’t sugarcoat things―he’s very matter-of-fact about his concerns and projections for the future. And most of them don’t bode well for the U.S.
I’ll be posting an interview with Jim Rogers on the site in the coming week, but for now, I just wanted to offer some highlights from his speech at ETF Securities’ mini-conference and the Q&A that followed.
1. The 21^st century belongs to China
According to Rogers, the 19^th century was the era of the British Empire and the 20^th century was the U.S.’ heyday. But the 21^st century is China’s (though the rest of Asia is definitely going to get a boost too).
The reasons for this are many, but some points brought up by Rogers include the following:

1. The Chinese want to live like we do;
2. They are more eager to work;
3. They are better at saving;
4. There are 1.5 billion Chinese citizens (and 3 billion people in all of Asia), and we owe them money. They are, according to Rogers, “among the best capitalists in the world.”

There will be some setbacks, of course, Rogers says, but these are opportunities. “If you see setbacks in China, you should pick up the phone and get more involved,” he advised, before adding his favorite refrain, “The best advice of any kind that I can give you is to teach your children and grandchildren Chinese.”
China’s path to world domination started with Deng Xiaoping’s capitalist programs in 1978, and there hasn’t been any looking back since. Rogers views China’s dominance as nigh-on unstoppable except for one little thing: its water problem. There are parts of the country that are running out of water, and when the water disappears, Rogers points out, so does civilization. However, the country is acting aggressively to combat the problem, and he doesn’t view it as that much of a threat.
2a. Jim Rogers is not a Ben Bernanke fan
Yep, it’s a fact. No “Team Bernanke” shirts for Jim Rogers (who said to scattered applause during the Q&A session that if he was in charge of the U.S. economy he would “abolish the Fed and resign.”).
Rogers is appalled by the government’s actions—Bernanke’s in particular. The U.S. government’s strategy calls for the debasement of the dollar, he says, calling it a “horrible policy.” While he concedes it can work in the short term, it NEVER works in the mid- or long term.
“He’s going to run those printing presses until we run out of trees, because that’s the only thing he knows,” Rogers said of Bernanke.
Add that on top of the country’s rapidly growing astronomical debt, and Rogers believes you’ve got a recipe for disaster.
2b. The U.S. dollar is screwed
Consider this a corollary to point 2a. Its status as a reserve currency is teetering on a precipice, in Rogers’ opinion, and he’s not alone. In fact, so many people are selling dollars right now that he’s sitting tight, waiting for a possible—and ultimately unsustainable—rally in order to exit the market. Of course, if it fails to rally and just drops again …

“I’ll just have to panic and sell like everyone else,” Rogers said.
3. Commodities, commodities, commodities
OK, as mentioned before, there are 3 billion people in Asia, most of whom are aspiring to play the home version of the American Dream game show. And let’s face it: American society is largely about consumption. We like stuff―we buy it, we wear it, we eat it, we flaunt it, we sometimes even bedazzle it (yeah, Google that). So that’s a lot more consumption on the global level. Rogers notes that while consumption is expected to increase exponentially, not a lot of capacity has been added in the last few decades for a lot of commodities. Meaning, not a lot of new refineries have been built, and not a lot of new resources have been discovered or excavated for a variety of commodities.
In terms of oil, Rogers cites the fact that Saudi Arabia has not seen any new oil discoveries but has consistently said for the past two decades that its reserves are at 260 billion barrels (in which time it has sold 60 billion barrels). He also points out that farmers are a rapidly disappearing species. So to sum up―that’s a lot more people competing for diminishing resources (including the all-important energy and food). Basic supply and demand theory pretty much takes it from there.
“Commodities are the second-largest asset class in the world,” Rogers noted. And they are “the best anchor” for your portfolio, he adds.
Rogers says the typical life span of a commodities bull market is 18-20 years. We’re currently in year 11 right now. Yeah, it could end tomorrow, but that whole supply and demand imperative could also extend this bull beyond its typical time frame.
During the Q&A session, though, the conversation took a darker turn. One questioner asked if the increased competition for resources might lead to war, and Rogers allowed it was a possibility, though he hoped it would not come to that. He pointed out that when a rising power clashes with an established power, the result is usually war, and said that research consistently shows that resource shortages lead to war.
So, sure, commodities shortages might start World War III, but if you invest in the commodities themselves, you might at least be in decent financial shape when the shelling stops—and I’m not being flippant at all. War drives up the costs of commodities.
4. U.S. government bonds are the next big bubble
Well, would you lend money to us? Rogers says short-term bonds are probably OK, but he advises getting out of anything with a longer maturity. He calls it “inconceivable” that anyone would lend money to the U.S. for 30 years at the going rate, and notes that the U.S. was a creditor nation as recently as 1987.
“Now the U.S. is the largest debtor nation in the history of the world,” he said.
And for bond portfolio managers, he had some very pointed advice: “Get a new job.”
5. Protect yourself
The underlying theme of Rogers’ entire speech was that the world is changing, and here are some things you should know if you want to come out the better for it (and for your family members, clients, etc., to also come out the better for it) financially. Based on Rogers’ observations, it seems recognizing that change is a key step, but so is adapting to it (see advice regarding learning Mandarin, for example).
And in Rogers’ eyes, commodities are a good way to achieve this protection. No investment is certain of course, but right now, he thinks commodities look pretty darn good.
Best Comment Of The Night
Addressing one audience member’s question, Rogers asked if the young man were an MBA. The questioner admitted to holding an MBA and was promptly told he should swap his MBA for an agriculture degree from Texas A&M.
“You should become a farmer,” Rogers said.
That’s an old line for Rogers, but he added a new wrinkle. If you’re not going to become a farmer, you should open the first Lamborghini dealership in Iowa. Because with farmers closing in on extinction just as the world needs more food, that’s probably what they’ll be driving in a few years.

The largest borrower in the municipal market

Just ten weeks after the new budget, California is going deeper into the red. For years states have been using various accounting gimmickry to meet legal budget limits. All of this profligacy and coverup is now being revealed in this downturn.
Several points might be relevant here. California is probably not salvageable because the Feds cannot afford to bail them out along with the other states in similar condition. Even now, states and the Federal government seem unable or unwilling (probably the latter) to recognize the magnitude of the economic crisis. The strategy of wallpapering over the cracks caused by the sinking foundation still appears to be their only solution. Why not? It always worked in the past. But the past is no longer. We are in the “new abnormal,” a condition unlike the past 30 years. Arguably that period might be labelled the “old abnormal” because of the credit explosion that created an unsustainable boom. The “new abnormal” will see the reversal of this process with a de-leveraging period that could last for a decade or more. As this occurs, spending will drop well below norms as savings is increased. Unemployment will continue at high rates. This process will be painful and long.  The “new abnormal” will be characterized by a lower standard of living than people expect or want. It will produce lower tax revenues, too low to sustain overbloated governments structured for the continuation of the previous Alice-in-Wonderland economy. Governments will fight adjusting to this situation, playing for time and tweaking here and there to get through. But this period will not end shortly and some governments might.
For years California has been considered the bellweather of change in the United States. Unfortunately, in their spending and budget crisis, they are probably still the lead cow. Look for similar “bankruptcies” to follow in other states shortly and perhaps the Federal government as well.
This article from Bloomberg provides details.

California Budget Is Already in the Red 10 Weeks After Passage

Schwarzenegger will know within a month whether a $1.1 billion drop in revenue collections is part of a growing budget shortfall or an isolated event, his budget spokesman said. Revenue in the three months ended Sept. 30 was 5.3 percent less than assumed in the $85 billion annual budget, state controller John Chiang reported yesterday. Income tax receipts led the gap, as unemployment reached 12.2 percent in August.
“The culprit here appears to be estimated quarterly personal income tax statements,” H.D. Palmer, the governor’s budget spokesman, said yesterday. “The numbers are cause for concern, but the issue now for us is to determine if this is a one-time event or whether it has more long-term implications.”
The latest figures show that California is facing resurgent fiscal strains brought on by the U.S. recession. Since February, Schwarzenegger and lawmakers have cut $32 billion from spending, raised taxes by $12.5 billion and covered $6 billion more with accounting gimmicks and borrowing. Even with those actions, state budget officials predict an additional $38 billion in deficits in the next three fiscal years combined, including $7.4 billion in the year starting July 1.
Schwarzenegger must present a budget for the coming fiscal year in January. The state’s Franchise Tax Board will deliver new data to the governor in November.
Debt Sales
The budget news comes as the most populous U.S. state prepares to sell as much as $15 billion of bonds in the next nine months to refinance debt and fund public-works projects, and as a surge in fixed-rate municipal issuance sent benchmark rates up by the most in almost four months.
California, already the largest borrower in the municipal market, may offer $4 billion of debt during the week of Oct. 26 to refinance the bonds used by Schwarzenegger to cover previous budget deficits. The budget enacted in July would allow the sale of as much as $11 billion more of general obligation bonds through the June 30 end of the fiscal year if financial markets allow, state Treasurer Bill Lockyer said. The exact sale amount hasn’t been decided.
“If the market is inhospitable, we won’t go,” Lockyer said in an interview yesterday. “We’ll just have to wait and see how the feelings are when we get ready to think about it again.”
Additional bond sales by California would follow an offering of $4.1 billion of general obligation bonds this week.
Scaled-Back Offering
The state was forced to scale back the size of the deal by almost $400 million as benchmark yields surged. The yields climbed after gains in the tax-exempt market last week pushed them to a 42-year low.
California’s sale follows a two-month rally in municipal bond prices, fueled by a record flow of money into mutual funds that outweighed lingering fiscal strains on localities, said Craig Elder at Milwaukee-based Robert W. Baird & Co.
U.S. Treasuries also fell, sending two-year notes toward their first weekly loss since the period ended Sept. 18. Federal Reserve Chairman Ben S. Bernanke said the central bank is ready to tighten monetary policy once the outlook for the economy improves.
California, a state that’s been among the hardest hit by the recession, had already issued $22 billion of debt since March, including $8.8 billion of notes that provided the state with an advance on taxes collected next year.
Even after increasing what it would pay, California still borrowed more cheaply than during previous offerings. A taxable California bond maturing in 2039 yielded 7.23 percent this week, down from a yield of 7.43 percent during a sale in April.
“Everybody thinks there’s still an appetite for California bonds,” Lockyer said. “There’s certainly a continuing need for long-term investments in schools, high-speed rail, stem-cell research centers and so on.”

Businesses unable to borrow money

The private sector must lead a recovery because it alone produces goods and services. Without this sector, there can be no reversal in job losses and no recovery. Here is more evidence that the private sector is not expanding. It is still shrinking.

Banks cutting back on loans to businesses

Credit squeeze on entrepreneurs threatens to derail recovery

WASHINGTON (MarketWatch) — U.S. banks are reducing their lending at the fastest rate on record, tightening the credit squeeze and threatening to leave many otherwise viable businesses unable to borrow money to expand their businesses, meet their payroll or refinance their maturing debts.
According to weekly figures provided by the Federal Reserve, total loans at commercial banks have fallen at a 19% annual rate over the past three months, while loans to businesses have dropped at a 28% annualized pace.

While such a step is not inevitable

History is replete with situations where the middle class of a country has been wiped out as a result of the profligacy of its government. If one believes the risks of such an outcome are high, steps should be explored that will protect one’s savings and wealth. If you believe the dollar is going to collapse, you move investments out of the dollar. One way for US investors is to invest in non dollar-denominated instruments like foreign stocks, foreign bonds, foreign currencies and CDs in foreign banks. Unfortunately, history is also replete with government reactions in such situations. In virtually all, the government prevents its citizens from protecting themselves by imposing capital controls. Rather than government enabling or encouraging its citizens to protect their savings and wealth, they preclude them from doing so via “emergency” legislation. While such a step is not inevitable, it becomes highly probable as less capital enters this country and more leaves. Capital controls are never discussed in advance; they appear as a “surprise,” effectively precluding any protective actions.

Postponing repayment of principal and interest

Here is an idea so absolutely idiotic that it is hard to believe our government didn’t implement it first. It is from the Japanese, perhaps reflecting the creative thinking responsible for their outstanding economic results of the past two decades. Apparently, if a bank customer is a deadbeat, the bank will not have to classify the loan as non-performing or set up loss reserves against it. Now that is a strategy that should produce stronger banks.

Japanese banks’ bad loans won’t be driven higher by a proposed moratorium on debt payments by struggling small companies, said Financial Services Minister Shizuka Kamei.
Lenders won’t have to classify loans encompassed by the plan as non-performing, Kamei, 72, said in an interview yesterday at his office in Tokyo. That means they won’t be forced to boost provisions when borrowers postpone repayments of interest or principal, he said. At the same time, Kamei vowed to push banks to extend more credit to small businesses after bankruptcies hit a six-year high in Japan.
“We’re going to get financial institutions to provide these firms with more loans,” said Kamei. “Banks won’t have to treat debt on which they provide a moratorium as bad.”
The moratorium, postponing repayment of principal and interest, will be extended to individuals as well as firms Kamei said. It will aim at giving relief to companies with about 100 million yen ($1.1 million) or less in capital.
“As long as I’m financial services minister, I’m not going to leave small companies in the lurch unable to get loans,” Kamei said. “If a bank takes that approach, I’ll hit them with a business improvement order.”

This may be one of the most asinine economic policies ever implemented, very high praise indeed given all the competition. A third-grader should be able to spot the fallacies in such policy. Weak banks will be made even weaker. Strong banks presumably would be able to stop pouring good money after bad and recognize the loss (although I have no idea how much being hit with “a business improvement order” hurts). Even more damaging will be the unintended consequences. The law effectively coerces banks to overturn contracts at the whim of the State. That has frightening implications for all business, not only banks. For banks, it dramatically raises the risks of lending money, ensuring that future loans will be more restrictive than they otherwise would have been.
The idea is so bad that we should expect to see it surface here. Oh yes, we have already heard it discussed in different variants — forced moratoriums and/or cramdowns on mortgages. Thus, our government has not lost its creativity, but appears to be a bit tardy on applying such ideas. Whether this tardiness reflects ineptness or the acquisition of a conscience should not be too difficult for the reader to figure out. On the other hand, perhaps our creativity is slipping. After all, cash for clunkers was not our idea. We copied others.

Gold and silver in large international transactions

Beware! The noose around the dollar’s neck continues to tighten. A developing headline (no story posted yet) on Drudge reads: ARAB STATES LAUNCH SECRET MOVES WITH CHINA, RUSSIA, FRANCE TO STOP USING DOLLAR FOR OIL TRADING... DEVELOPING... Another informative story on Howe Street contained the following:

SDRs, or Special Drawing Rights, are a synthetic currency originally created by the IMF to replace gold and silver in large international transactions. But they have been little used until now. Why does the world suddenly need a new global fiat currency and global central bank? Rickards says it because of “Triffin’s Dilemma,” a problem first noted by economist Robert Triffin in the 1960s. When the world went off the gold standard, a reserve currency had to be provided by some large-currency country to service global trade. But leaving its currency out there for international purposes meant that the country would have to continually buy more than it sold, running large deficits; and that meant it would eventually go broke. The U.S. has fueled the world economy for the last 50 years, but now it is going broke. The U.S. can settle its debts and get its own house in order, but that would cause world trade to contract. A substitute global reserve currency is needed to fuel the global economy while the U.S. solves its debt problems, and that new currency is to be the IMF’s SDRs.

Income is a meaningless measure

The age-old argument of how much government is the right amount has no simple answer. In society it is always easy to point out some perceived inequity and conclude: “There ought to be a law!” But should there?

Each and every law steals a bit of freedom from society. The empirical data, at least in terms of per capita income, is clear. The more freedom, the higher the per capita income. While per capita income may not measure “quality of life” to anyone’s satisfaction, there is no objective measure that can. Per capita income is objective, albeit imperfect. It measures, in some manner, the range of options available to an individual. To the extent that one has more options, he is able to define “quality of life” in ways that are unavailable with fewer options. A rich man can choose to live as a poor man, but a poor man cannot succeed (at least for long) spending as if he were rich.
None of this discussion is meant to judge a person’s character or goodness by his net worth. As anyone with normal life experiences knows, there is no correlation between the two measures.
The chart below captures a relationship between freedom and per capita income. The disgruntled might argue against such data by attacking the definitional classifications. More likely they will argue that per capita income is a meaningless measure. But what is a better one?

A vision of the future by Bob Dylan

A vision of the future by Bob Dylan from his song, “Hard Rain.”

And what did you hear, my blue-eyed son ?
And what did you hear, my darling young one ?
I heard the sound of a thunder, it roared out a warnin’
I heard the roar of a wave that could drown the whole world
I heard one hundred drummers whose hands were a-bleedin’
I heard ten thousand whisperin’ and nobody listenin’
I heard one person starve, I heard many people laughin’
Heard the song of a poet who died in the gutter
Heard the sound of a clown who cried in the alley
And it’s a hard, it’s a hard, it’s a hard, it’s a hard
And it’s a hard rain’s a-gonna fall.

Stocks aren’t going to zero

As deflation appears (at least at this point) to have the upper hand, gold advocates face questions if not incredulity regarding their strategy. Rolfe Winkler deals with this issue in a column he wrote for Reuters here that is heavily dependent upon a Bloomberg column. He begins as follows:

Alice Schroeder wrote a great column for Bloomberg yesterday that I’m just getting to. The best stuff comes at the end, where she describes why some people are buying gold even though inflation doesn’t seem to be a big risk.

Winkler’s article and his references provide rationale for gold even under a deflationary scenario. His article ends on a scary note:

Stocks aren’t going to zero. They have option value. But a 90% fall from the peak is what I see happening eventually. Over what time frame, I haven’t a clue.

Often mistaken for deflation

“We are certainly in a deflationary state,” said David Rosenberg, chief economist and strategist with Gluskin Sheff and Associates in Toronto. “Of that, there’s no doubt. I think people still have no clue as to just how weak the economy is,” Mr. Rosenberg said.

There are many in both camps of the inflation-deflation battle. Knowing how this ends is important because of the long-run investment implications. I believe that the government, unequivocably, is attempting to engineer inflation. But knowing what they are aiming at is not enough. Their track record in all areas is quite abysmal, rivaling the Keystone Cops. Final results are often 180 degrees from intended.
I believe it is still too early to make a final judgment regarding inflation or deflation. Calls made now are only predictions. As Rosenberg points out, some prices are declining. That, however, is a symptom of deflation rather than deflation itself.  Other prices are increasing (symptom of inflation), financial assets being the most obvious . The Fed is flooding the system with liquidity (inflation), while credit implodes (deflation). In the battle between Fed liquidity injections and market credit contraction, the Fed is currently behind. Whether the final score reflects that or not is still moot.
Apparent deflation at this point is not necessarily inconsistent with future deflation or inflation. An unrecognized adjustment downward in the standard of living is often mistaken for deflation. I think a lowered standard of living for this country is inevitable. My guess is that inflation, some time in the future, is also.

The US economy are harmed

Is history about to repeat regarding a currency crisis?

Many predict that our current economic mess will ultimately trigger an international currency crisis. While the dollar has been weak for several years, it has not yet”collapsed.”  Those who see this end fall into two camps. The first camp believes at some point there will be a rush to abandon the dollar on the part of foreigners triggering a collapse. The second camp believes that a new international currency will be “sprung” on the world that will involve in some manner a severe devaluation of the dollar. Either way, both the dollar and the US economy are harmed.
The last major currency crisis was August 15, 1971 when Richard Nixon closed the gold window. This action was taken with no advance notice and involved a de facto and de jure devaluation of the dollar. Until that point we were under the Bretton Woods accord and on a quasi gold standard. International currencies were pegged to the dollar at fixed rates and the dollar was pegged to gold. Any foreign country had the right to redeem its dollars for US-held gold. Pressured by dollar redemptions for gold, primarily by Charles de Gaulle of France, US was forced to default on its redemption promise as US gold supplies shrunk.  From that time forward the world has been on a fiat currency system known as the floating exchange system. Nothing backs any currency. Currencies all “float” in value relative to each other.
Currently there is much open talk of the need for a new currency system. Russia, China and others have expressed dissatisfaction with both US fiscal/monetary policies and with the dollar as the international currency. One may only speculate regarding the private discussions regarding the problem/solution. With certainty, options are being considered. None of these will be good for the dollar or the US. It is likely that whatever change occurs will be without advance warning, at least for us normal citizens.
Some behind-the-scenes information has been made available regarding private discussions that preceded the 1971 announcement. Tyler Durden has some fascinating pieces pertaining to these matters. They are highly recommended for those who enjoy economic history, especially because it may be in the process of repeating or at least rhyming.

Government-granted monopoly

Arguments regarding an audit of the Federal Reserve can be made pro and con.  The quote below, from testimony from Thomas Woods before Congress, captures the moral case for an audit.

The superstitious reverence that Americans have been taught to have for the Federal Reserve is unworthy of the dignity of a free people. The Fed enjoys a
government-granted monopoly on the creation of legal-tender money. It is not an unreasonable imposition for Americans to demand to know about the activities of such an institution. It is common sense.

Unemployment insurance benefits

Employers took 2,690 mass layoff actions in August that resulted in the separation of 259,307 workers,
seasonally adjusted, as measured by new filings for unemployment insurance benefits during the month,
the U.S. Bureau of Labor Statistics reported today. Each action involved at least 50 persons from a
single employer. The number of mass layoff events in August increased by 533 from the prior month,
and the number of associated initial claims increased by 52,516. Over the year, the number of mass
layoff events increased by 803, and associated initial claims increased by 70,356. Year-to-date mass
layoff events (21,184) and initial claims (2,162,202) both recorded program highs through August. In
August, 900 mass layoff events were reported in the manufacturing sector, seasonally adjusted, resulting
in 93,892 initial claims. Over the month, the number of manufacturing events increased by 279, and
associated initial claims increased by 21,626.

Trying to monitor inflation

The manner in which the government keeps its books would shame Enron. Ditto for the statistics they report as economic data.  Here is the latest example described  by John Mauldin. His comments are always insightful.

“Speaking of deflation, let me mention something I find totally outrageous. Normally, I actually take up for the bureaucrats who are stuck with the task of trying to monitor inflation. It is a tough job, and like Monday-morning quarterbacks, everybody thinks you should have done it differently. I can understand the rationale for hedonic measurements, housing rent equivalents, etc., even if I don’t agree with them. You have to set some rules and live with them. But the latest imbroglio is disgraceful.
It seems the US Bureau of Labor Statistics, in the CPI next week, will treat the subsidy received by those 800,000 car buyers who bought a car in the “Cash for Clunkers” program as if the price of a car fell by $4,500. Really? My tax dollars account for nothing?
This does several things. It will decrease the inflation used to adjust the GDP for this quarter. Not the end of the world, but annoying But what really matters is that the CPI is used to calculate Social Security increases and interest paid on TIPS.
If I tried to defraud one of my clients using such accounting legerdemain, I would be shut down, sued, and taken to court (at the minimum) by the host of regulators who look over my shoulder. And I should be! You don’t make such changes in the rules to your own benefit. But that is what the BLS did. This policy should be overruled immediately.

The great credit unwind

Economic conditions will be sub-par perhaps for a decade or more as a result of the great credit unwind. For the past 20 plus years consumers spent most or more than their income by taking on extraordinary levels of debt. As Karl Denninger writes today:

We have blown several trillion dollars in a futile attempt to stave off the contraction in debt outstanding and GDP that must come. The contraction is still coming, but the several trillion we wasted in an ill-advised attempt to prevent the inevitable is all gone.

Make sure you thank Bernanke, Geithner, Obama, and of course Paulson and Bush.

Attempts to avoid the necessary adjustments are futile. They only ensure that the US ends up with a lost decade or two like Japan. That is if we are lucky, and the bottom does not drop out. At this point, debt levels exceed the levels where they can be comfortably serviced and contraction must take place.

This contraction has to happen

There cannot be a recovery without the consumer. The consumer cannot increase his spending from recent years without increasing his credit load. But he is overleveraged and is in the process of correcting that, despite what the government might want him to do. Consumers seem to be more intelligent, at least in their actions, than our government. Another rapid response by Karl Denninger:

FLASH: Consumer Credit RECORD Contraction

*U.S. JULY CONSUMER CREDIT WAS FORECAST TO DROP BY $4 BILLION
*U.S. JULY CREDIT CARD, OTHER REVOLVING DEBT FALLS $6.1 BLN
*U.S. JULY NON-REVOLVING BORROWING FALLS RECORD $15.4 BILLION
*U.S. JUNE CREDIT FALLS $15.5 BLN, REVISED FROM $10.3 BLN DROP
*U.S. JULY CONSUMER CREDIT FALLS RECORD $21.6 BILLION, FED SAYS
Forget the so-called “recovery” given these sorts of numbers.
Consumers are unable and unwilling to borrow.
The inevitable contraction that is necessary to put the financial system back into balance is happening – whether The Fed wants it to or not.
This is a roughly 0.8% contraction in one month.
This contraction has to happen – it is on-balance a good thing that it is, in that only by clearing the debt load can be stabilize our economy. 
However for those who are looking for evidence of a significant rebound in economic activity you’re going to be disappointed!
The Fed does not have the updated tables yet on their data program; when they do I will re-run my previous credit graphs and post them.
They’re ugly.

Currently traditional measures of money

Inflation is usually misdefined as a period of generally rising prices. Inflation, properly defined, is an expansion of the money supply. The problem is what we mean by “money supply.” Traditional definitions such as M1, M2, etc. have become less useful as a result of technology and financial innovations. Currently traditional measures of money are increasing while private sector debt is contracting and government debt is increasing. On balance, I believe total debt has actually increased, although there appears to be substantial contraction to come in the banking system as a result of overstated assets.

Rising prices is one of the effects produced by the “cheapening” of money. No index is capable of properly measuring these effects. All indices are subject to measurement errors. More importantly, all indices suffer from weighting and inclusion decisions. The Consumer Price Index (CPI) is published by the BLS and assumed to be a proxy for the effects of inflation. It purports to measure the rate of price changes for a typical consumer. It does so imperfectly, even with honest and accurate measurements. Inflation effects are not limited to consumer goods. Often they are felt in financial assets and capital goods (housing, capital investments by business, etc.) long before they show up at the consumer level.
Despite all the fear regarding deflation, it is possible that we are experiencing inflation right now, despite the fact that its effects do not show up in the CPI. Edwin Harrison discusses an article by Caroline Baum that deals with this issue:

Quote of the day: William White and inflation

Caroline Baum had a good column today at Bloomberg in which she suggests central banks consider asset prices in monetary policy going forward. In the piece she quoted William White, a former economist from the Bank for International Settlements. He said:

“The most calamitous downturns were not preceded by any degree of inflation. There was no inflation in 1873-74, in the 1920s, in the 1980s in Japan and in the 1990s in Southeast Asia.”

This is a very important historical point because central banks have been fixated on consumer price inflation for years as a result of runaway consumer prices in the 1970s. However, consumer price inflation and inflation are not the same thing. Inflation comes from increasing the money supply and increased credit.
During the 1990s and this past decade, there were a number of factors which suppressed consumer price inflation, the fall of the Iron Curtain and the integration of China into the global economy being the most important. As a result, increased money and credit found its way, not into consumer prices but into asset prices fueling several destabilizing bubbles along the way.
If central banks want to be more successful going forward they will need to heed Caroline Baum’s advice and start to consider asset prices as well.

All problems look like nails

There is no mathematical possibility of escaping the economic bind we face without reducing the welfare state. The current financial crisis only exacerbates a situation which long ago passed the tipping point. The Federal government’s total liabilities exceed $100 trillion (most of that from the unfunded liabilities of the welfare state: social security, medicare, etc.). With the financial crisis, we now have an additional black hole, our banking system. The condition of the banking system has been covered up, but that is becoming harder and harder to do as banks collapse under their own weight as a result of deteriorating conditions.

To the government and the Federal Reserve the only tool they have ever possessed (or learned to use) was a hammer. Thus, all problems look like nails. They only know how to spend and inflate, exactly the actions that brought us to this point. This approach has never succeeded economically, but it has managed to cover up past crises. Of course that was acceptable for virtually all politicians.
The present economic thrust is an attempt to (temporarily) save the welfare state at the expense of destroying the dollar. Unfortunately, that will not prove possible. At some point, probably not too far off, the dollar will collapse. Once the dollar is emasculated our standard of living will dramatically shrink, and future economic growth will approximate that of Old Europe. Under such conditions the carrying costs of the welfare state will be impossible to bear. We will lose both the dollar and the welfare state. In dangerous times such as these, governments are often overthrown with new entities appearing that look nothing like the structure they replace.
There is no way to reasonably estimate the timing of the dollar collapse which will trigger the entire process. A catalyst will probably be the Treasury market where interest rates will start to increase to reflect higher default risk. Regardless, it appears as though we are getting close. The dollar has been very weak, and the anti-fiat currency, gold, appears strong. If (when?) the event occurs, it likely will come very quickly. Too many Central Banks are holding too many dollars and Treasuries. At some point a panic to get out of the dollar is likely. Once the first domino falls, the entire global system is apt to implode swiftly. These are indeed dangerous times.

loose monetary policies

This is a comment from a knowledable reader P. W. Dunn at to a recent post, Speculators Only. It provides insight into how he is trying to navigate these treacherous markets and what he perceives to be future events.
His crystal ball is no better than others, yet he has a clearly defined strategy. It may be useful in helping to develop your own.
Neither I nor Mr. Dunn suggest you act based on his opinion. It is merely an example of how one investor thinks. It is in no way a recommendation.
I would like others who feel comfortable doing so to send in their approach to dealing with current and future markets. You may do so anonymously if you prefer by emailing me directly. Perhaps a cross-section of ideas will be helpful to others in developing a strategy.

There is the saying, “Those who remain calm while others panic, don’t know what the hell is going on.”  It is a troubled time and I genuinely feel bad for what central banks are doing to people’s savings.  But as you say, speculators will make and lose a lot of money.  The biggest winners today are those upon whom Bernanke’s shines his favor, such as the big banks that borrow money from the Fed and lend it back to the government, which is perhaps the biggest Sopranos-type racket going:  but it’s not some kind of under the table pay-offs, but it’s being done right in front of all of us and with impunity.
The 2008 market crash has been particularly devastating on people’s savings.  They were forced by inflation to buy so-called “risky” instruments, esp. stocks. Then that bubble burst twice in less than a decade.  Stung by that, they are still too scared to bet on the market again, and so Bernanke, and the other sovereign banks around the world, have robbed them blind through their loose monetary policies.  In Canada for example, there has been something like a 20% increase in the cost of houses since the summer of 2008, due to the Bank of Canada keeping the interest rates at ridiculously low rates.  So you can’t sit on cash–because the riskiest investment in an inflationary environment is cash in a savings account that pays 1%.  Here in Canada since the nadir of the stock market crash, such cash has lost about 19% against real estate and much more against stocks and gold.
The stock portfolio I manage is now almost all commodities (oil & gas, gold mining), 100% Canadian-based (as I live in Canada), and I am shorting the US dollar to buy these companies.  I am selling cash or margin covered puts (on oil & gas, gold-mining companies, etc.) for income (which gives from 5-10% downside protection) and, because I can’t trust my margin to stay high in market downturn, I am accumulating unused lines of credit as my hedge against deflation,with the view of seizing the day if there is a market crash.  I believe the investor must be aggressive and engaged–you can’t have a “lazy” portfolio today (John Mauldin said the same in his most recent interview with Steve Forbes).  The goal must be to beat inflation, and the higher that goes, the more aggresivity is necessary.  Or if I had to sit out as you suggest, then I would put most of my funds into silver, gold, non-perishable foods, or other commodities–things with durative and intrinsic value (gold and silver are liquid and so are excellent choices, but you have to have a safe place to put it).  Most people’s best hedge against inflation is still their mortgage, as Bernanke’s devaluation of the dollar will also reduce everyone’s debts.  It’s the Year of Jubilee, when everyone’s debts will be canceled, especially the Federal government’s.  Or as Dickens says, “It was the best of times, it was the worst of times … “

The inflation trade came back

WHAT WAS THE TOP PERFORMING ETF AND SECTOR OF 2010?

Contrary to popular opinion the inflation trade came back with a vengeance in 2010. Year to date, the ultra silver ETF ranks the highest performing ETF up 88 percent. Second place? Cotton, up 65 percent. The silver mining ETF, SIL went public in the summer, so it is at a disadvantage when comparing year to date returns. Using its holdings to project year to date returns it would have been the second best performing ETF up about 81 percent year to date.
Not surprisingly, precious metals were the best performing sector, as quantitive easing acts as rocket fuel for hard assets. A dubious runner up was real estate which benefited from an increase in farmland, forestry and raw land values as well as higher rental rates with lower purchasing costs. In line with themes which TradePlacer has focused, the other top sectors were agriculture and Latin America led by Colombia as a top performer. Latin America will become a leading exporter of agricultural products and other natural resources in the coming decade.

Been working against all of these goals

Another forecast regarding the BIG ONE coming soon. May be useful to you as you ponder a strategy to deal with the difficult times ahead:

Preparing for The Big One, Coming Soon

Financial and Geopolitical Intelligence “Attempts to bail out the Irish banking sector via multinational loans will only increase debt burdens in Europe and lead to a nightmarish scenario there, says New York University economist Nouriel Roubini. There is too much private debt in Ireland, and aid from the International Monetary Fund, the European Union or whoever merely amounts to pushing the payday down the road and ultimately increasing the total amount owed in the end. “Now you have a bunch of super sovereigns – the IMF, the EU, the eurozone — bailing out these sovereigns,” Roubini tells CNBC, adding nobody “from Mars or the moon” will bail out the IMF or the eurozone once Ireland’s debt is socialized. “At some point you need restructuring,” he told CNBC. “At some point you need the creditors of the banks to take a hit — otherwise you put all this debt on the balance sheet of government. And then you break the back of government — and then government is insolvent.”… “If Spain falls off the cliff, there is not enough official money in this envelope of European resources to bail out Spain. Spain is too big to fail on one side — and also too big to be bailed out.” “Roubini: Debt Nightmare Unfolding in Europe” Forrest Jones, Moneynews, 11/19/10 “History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance.” President James Madison “Americans over-consumed and over-leveraged, but who enabled that trend to take place? Only the lenders could have facilitated such a spending spree. So then it was the predatory lending of banks? In part, but we must go further to the root of the problem. Who directs the lending capacity and practices of the big banks? Why the central bank, of course! Ever since the Depository Institutions Deregulation and Monetary Control Act passed in 1980, all banks fall under the purview of the Federal Reserve. It was the Federal Reserve that artificially lowered interest rates and borrowing costs to historically low levels in order to excite the debt bubble which then burst in 2008. Credit was easy. In fact, it was so easy that big banks practically threw money at people unqualified to handle mortgage payments.” “Economic Implosion Sets The Blame Game In Motion” Giordano Bruno, Neithercorp Press, 11/19/2010 “Ben Bernanke has said that the Fed is trying to promote inflation, increase lending, reduce unemployment, and stimulate the economy. However, the Fed has arguably – to

The traditional economic model

I am long overdue on this second of a series of articles on investing.

This article deals with the background conditions that will influence (likely dominate) the economic future. It is necessary to understand these in order to understand what is likely to occur, so I wanted to emphasize these prior to presenting a forecast.
These factors are entirely unique, at least for anyone living today. Pundits and forecasters using traditional economic measures and models are wasting their time and misleading themselves unless they incorporate these considerations into their thinking. These factors are so powerful that they will overwhelm the traditional economic model.
The media has not been very helpful in either presenting or understanding what has happened and the associated implications. The backdrop to the future is more ominous than reported. CNBC continues its pollyanaish reporting while other outlets either don’t understand or want to protect the political establishment.
If you have a financial advisor, it is important that he formalize the circumstances that will dominate our future.

Everyone should trade stocks

A post by Adam Hamilton about the values of trading, monetary and otherwise. Mr. Hamilton has probably been more successful than most in achieving financial independence.
Even if you cannot achieve abnormal returns there are other gratifications from trading.
I particularly liked Hamilton’s suggestion of getting your kids involved as early as p0ssible. It will make them more informed and teach them the value of saving, investing and living within their means.

Trading for Everyone By: Adam Hamilton, Zeal Intelligence LLC

Trading is awesome!  Everyone should trade stocks.  The benefits that trading brings to anyone who sticks with it are vast.  They spill over into and enrich all aspects of our lives, in a myriad of ways extending far beyond the obvious financial rewards.  And it’s never too late or too early to start learning this fascinating and empowering art.
Trading is something I’ve loved my entire life.  When I was growing up my father was a small-town banker, so he was naturally interested in the financial world.  On Friday nights I remember watching Louis Rukeyser’s Wall $treet Week on public television with my Dad.  I remember him reading the Wall Street Journal, and encouraging me to do so when he came across articles that would interest a young boy.
When I was 12, my father opened a brokerage account for me.  Of course back then you had to actually call your broker on the telephone to make a trade, so it was certainly intimidating at first.  Trading, and really anything new, always is.  But I bought some stock in IBM and never looked back from there.  I saved income from my summer jobs including fishing golf balls out of water traps, mowing lawns, and painting houses.  I invested some of my meager surplus income in stocks.
Trading was always exciting, and it changed my life for the better in countless ways.  I eventually founded my own financial-research company so I could study the markets, research stocks, and pursue my trading passion full-time. The financial rewards of trading are widely-known, I was blessed to become a millionaire before my 30th birthday.  But even if trading hadn’t made me rich, I’d still keep doing it for the vast intangible benefits.  I won’t stop trading until I’m dead.
Trading is incredibly liberating, breaking a crushing bond that enslaves most people their entire lives.  Trading divorces income earned from time on task. Salaried or not, we are all essentially paid to work by the hour.  But this is a problem, it creates an artificial ceiling on our incomes since our time is preciousand finite.  We can only devote so many hours each week to work before our lives become an unbalanced, unhappy disaster.  We effectively become financial slaves to our time available for work.
But trading earnings aren’t dependent on time.  When you buy a stock, and it rallies to earn you profits, it doesn’t matter whether you spent 1 hour deciding to make that trade or 100 hours.  Trading opens up a wonderful new world where income is divorced from time!  While it is true that trading is a learned art that requires years of discipline and experience to thrive in, the ultimate financial rewards it yields are wildly disproportionate to the time spent learning it.  It breaks your income free from the chains of time.
The ultimate result of this liberation is the highly-sought-after goal of financial independence.  If you start trading and stick with it for decades, you will get good.  And trading mightily rewards experience, building fortunes for those who strive to master it.  Eventually your trading will at the very least set you up to retire much earlier than you otherwise could.  And since trading doesn’t require excessive time (a few hours a week of research is often enough), it can free up many hours for you to pursue your life’s passions.
Trading is a great equalizer, shattering all the limiting preconceptions that we burden ourselves with and others impose on us.  The world is tough and unforgiving, and often we feel inadequate.  The reasons are infinite.  Maybe the world teases you about something, looks down on you for some reason, or doesn’t respect you for who you are.  All these crushing limitations that saddle real life are obliterated in trading.
The markets could not care less about your background, your education, your faith, your age, your appearance, your sex, or any real or perceived shortcomings in your life.  All that matters is your own decisions.  Trading may very well be the last true meritocracy on the planet, where everyone is free to thrive or fail based solely on their own drive.  If you diligently strive to learn the art of trading, you can and will grow successful regardless of where you came from, where you are, or what limitations have burdened you.
Trading feeds your brain, as it demands constant yet fascinating learning.  I call myself “a student of the markets” as I continue to learn new things every day even after decades of trading.  If I lived and traded through 10 lifetimes, I’d still be a student of the markets.  We humans are all hard-wired to love to learn, to expand our horizons.  And trading provides learning in droves.  There are always new market situations to observe, new companies to analyze, and new factors driving the performance of stocks.
The more you trade, the more you will learn about the world around you.  You will gradually start to better understand the global economy, national economy, business in general, and how things work.  Traders view the world in a different light, pondering how the goods and services we need and want are created and ultimately delivered to us at a reasonable profit.  Every time you buy something, every time you interact with someone, your mind will constantly be sifting everything for trading opportunities.
Learning is naturally empowering and self-feeding, the more you know the more you want to know.  And knowledge and diligence ultimately lead to success, which builds self-confidence.  Once you start making money trading stocks, and you will if you apply yourself and stick with it, your whole worldview starts to change.  As your income becomes less dependent on your time on task, as the markets reward you for the merit of your own decisions, I guarantee you will feel better about yourself and life in general.
And this gift of learning extends far beyond the external, markets and stocks. The greatest challenges for trading lie in your own heart.  Your success depends on harnessing your own internal greed and fear, your greatest enemies.  As naturally-emotional creatures, mastering our own emotions isn’t easy.  But the more you trade, the more you will learn about yourself.  It literally forces you to look deep into your own heart, to try and dispassionately analyze the motivating forces driving your buying and selling decisions.
The more you learn about yourself, the deeper you journey into your own emotions, the happier you will ultimately be.  This quest for emotional mastery yields benefits far beyond the trading realm.  The longer you trade, the better you become at stepping back and calmly analyzing life situations that make you angry, sad, frustrated, whatever.  Controlling your own greed and fear helps you better control all your emotions, making you more even-keeled and slower to get upset in the future.  Imagine the benefits this has for marriages, family interactions, business relationships, and everything else!
Trading also yields great insights into other people.  Sentiment, how the majority of other traders view the stock markets or any given stock at any particular time, is the most important driving force behind price movements. Trading success demands buying low and selling high, right?  The only times stocks are low is when they are unloved and out of favor among the majority of traders.  Conversely, stocks only get high when they are popular and the majority of traders want to buy them.  Observing others’ sentiment gives you fantastic insights into life in general, and human nature, that are extremely valuable.
Trading also develops the wonderful ability to take the long view.  The tyranny of the present is intense in this Information Age, everyone worries incessantly about today while carelessly ignoring the past and the future.  Trading forces you to transcend today’s worries to see the big picture.  In order to buy low and sell high, you have to consider any stock’s history and future potential. This grows into a universal life-wide ability to keep the present in proper perspective, to not dwell on today’s challenges out of proper context.
I’ve always viewed trading as analogous to the wondrous Age of Discovery when great tall ships plied the world’s oceans with exotic trading goods.  They would sail to Asia at great risk and expense, and bring back spices to Europe that would fetch a fortune.  Traders bought goods where the supply was plentiful to transport them to where demand was great.  Stock trading today is like sailing the oceans of time.  We buy trade goods (stocks) today, and hope that demand for them (and hence their prices) will be higher in the future.
Trading demands discipline, which has unimaginably-big benefits in all aspects of life.  In order to trade, you first have to generate some surplus income.  The only way to do this is spend less than you earn.  The longer that you live below your means in general, the more you save, the richer you get.  This trading-forged discipline virtually ensures you will never have debt problems, never be in an ugly situation where you risk losing a major asset like your house.  It leads to a much-happier and less-stressful life.
Living below your means, regardless of what they are, also loosens the hold of money (greed) on your heart.  There is nothing wrong with building wealth, but the Bible is crystal-clear on the dangers of greed.  In his first letter to young pastor Timothy, the great Apostle Paul wrote, “For the love of money is a root of all kinds of evil, for which some have strayed from the faith in their greediness, and pierced themselves through with many sorrows.”  Paradoxically even though trading’s goal is to build wealth, greed is its mortal enemy.
A parallel trait greatly enhanced by trading stocks yourself is stewardship.  We are all blessed with financial assets, and how we manage them is of paramount importance for our futures.  No one cares more about your financial future than you do!  Trading stocks forces you to take more responsibility for growing your assets, gets you deeply involved in what you invest in and why.  While it is important to seek wisdom on investing from wise counselors, trading gives you the knowledge to ultimately make informed decisions yourself.  This leads to radically-better stewardship of your financial assets and entire future.
Trading builds honor and integrity like few other things can.  Why?  You arecompletely at the mercy of your own decisions.  When you make a trade that doesn’t work out, and it happens often as losing is a major part of trading, you have no one to blame but yourself.  Sadly we live in an era where personal responsibility and accountability are dying, people prefer to blame others for their own poor decisions.  But when trading you have no choice but to be fully responsible and accountable.  Nourishing these positive traits greatly impacts all areas in your life and relationships for the better.
Trading hones diligence and perseverance, maybe the most important life skills of all.  Like life, trading has many setbacks so opportunities to get discouraged are legion.  But if you stick with it, keep your nose to the grindstone for months, then years, and then decades, you will succeed.  The single most-important ingredient for success is to simply stubbornly keep doing something until you naturally learn enough to get good at it!  Most elite traders, CEOs, athletes, or any professionals became that way not because they had advantages up front, but simply because they never gave up despite the inevitable setbacks.
Incredibly, trading also helps you socially!  Not only does its built-in achievement bolster self-confidence, it makes you more interesting to everyone you meet.  Over the decades I’ve talked one-on-one with many hundreds, maybe thousands, of people about trading stocks.  And 99% of them are utterly fascinated by the prospect.  And who wouldn’t be?  The markets are endlessly fascinating, and the allure of divorcing income earned from time on task is great.  It is really fun sharing what you are doing in the markets with others, helping them see and seize the same stock opportunities you are.
If you are a parent, I’m sure you want your kids to excel in all these critical life traits.  Trading is a great way to teach them!  Start your kids out young, it’s easy and fun.  When you take them out to their favorite restaurant, talk with them about the process of getting the food to their plates.  Tell them about all the workers from the farmers to the truckers to the cooks, who labor hard and earn a profit for their part in the food chain.  If the restaurant is publicly-traded, explain to your kids that they can own a small piece of this businessthemselves!
Open up a trading account for your kids.  It really doesn’t matter how much money you can spare, the kids can gradually fund it themselves with cash gifts they receive on birthdays and Christmas and through doing odd jobs.  As they slowly buy and sell a few shares in stocks they are interested in because they love the products those companies produce, they will learn the same trading lessons and develop the same awesome life-traits as adults.  And starting young, even casual trading as a hobby can literally earn your kids fortunes over their lifetimes.  This skillset will almost certainly radically improve their lives.
Teaching kids about business and stocks is very empowering for them, they naturally love to learn.  It instills in them a broad practical worldview most people never experience, and increases the odds they will nurture their entrepreneurial side and ultimately do fulfilling work they love.  The earlier anyone starts learning about trading, and all the necessary peripheral topics like sound money management, the more successful they will ultimately be.
On the other end of the age spectrum, trading is equally beneficial to the elderly.  Sadly many people get bored in old age, it’s tragic.  They don’t exercise their brains so gradually their minds turn to mush.  Trading, since it demands endless learning, can seriously slow or even reverse this unfortunate deterioration.  Trading provides excitement for elderly folks, helping them feel plugged in to the world again.  It gives them something cool to talk about with their friends, kids, and grandchildren.  I’m going to continue trading until the day I die to keep my mind in training and razor-sharp.
So trading is awesome, everyone should trade stocks.  Easy for me to say, right?  What if you don’t have any money?  Believe me, that’s not a problem at all.  Almost every trader in the world started out with nothing, zero.  Traders start small, trading a tiny amount they can afford to lose when trades inevitably move against them.  But gradually as your knowledge of the markets, stock trading, your own emotions, and market sentiment around you grows, so too will your success.  There are endless accounts of traders starting out with a few-hundred dollars and ending up multi-millionaires a couple decades or so later.
Starting out small is actually really important.  If you start out trading with a lot of money, odds are you will lose it and get discouraged.  The great majority of traders lose almost all of their initial capital at some point in their first year or so of trading.  It is par for the course.  But the hard lessons learned, and the skillset developed through those early losses, scale beautifully to any amount of money as your trading prowess grows.  Even if you are blessed with lots of surplus capital, start trading small with an amount you can easily afford to lose.  As your confidence and skills gradually grow, only then should you start trading bigger.
The amount traded is totally irrelevant.  If you can earn a 20% return on $1000 in your earlier years, you can earn a 20% return on $100k or $1m as your capital grows.  The critical thing is just to get trading, start small and start learning the lessons stock trading teaches.  Get your greed and fear under control and grow your understanding of the markets and stocks when you have little on the line.  This foundation is essential to help you thrive someday in the future when you are risking a lot.
The hardest part of starting trading is making the commitment to live below your means.  Trading is seeded with surplus income.  Everyone has areas of fat we can cut from our lives.  For example, I love reading.  It’s my favorite leisure activity.  If I was a new trader and cash was tight, instead of buying new books I could simply check them out for free from my local library.  If you think hard, almost regardless of your income today you can probably find a way to scrape some surplus together over a year or so.
Stock trading is intimidating when you are first starting, but so is everything else.  Things like hobbies or interests you hold dear and really enjoy today were once overwhelming to you too.  Think about how intimidating it would be to learn golf, or gardening, or photography from scratch.  Everything new is intimidating, and trading is no exception.  But also like everything else, the more you get into it the more comfortable you will grow.  And you will have a lot of fun along the way learning about the markets and stocks.
We can certainly help you if you are interested in learning about stock trading. Every week I write essays like this one, discussing some aspect of the markets.  A few years ago I wrote a popular essay called “Stock Trading 101”. It will help you grow your knowledge and accelerate your understanding of the key core fundamentals of stock trading.  The more you read about the markets and stocks, even if you don’t understand everything (heck, I still don’t understand it all!), the faster your knowledge will grow.
My company also publishes the research my business partners and I do to use in our own ongoing stock trading.  Our flagship products are acclaimed weeklyand monthly subscription newsletters that analyze what is going on in the markets, with the explicit goal of finding high-probability-for-success stock trades.  Since 2001, all 222 stock trades we’ve closed in Zeal Intelligence have averaged annualized realized gains of +43.2%!  Has your capital grown at 40%+ a year over the past decade?  Subscribe today and start thriving!
We also do deep fundamental research into individual stocks so we can figure out which ones are the most promising to buy.  We just finished our latest project spending 3 months looking at nearly 100 silver stocks trading in the US and Canada.  We spent several-hundred hours gradually whittling this universe down to our dozen favorites fundamentally.  Then we profiled these elite silver stocks in a new 34-page report.  For just $95, you can enjoy the fruits of several months of expert research.  Buy a report today!
The bottom line is everyone should trade stocks.  The most obvious reason is for the financial rewards, the financial independence this pursuit ultimately yields.  But the crucible of trading also forges many awesome traits that greatly enrich your entire life.  It forces you to learn and grow your brain, it demands strict emotional control.  It creates discipline, honor, integrity, responsibility, diligence, and perseverance.
While sticking with trading will almost certainly make you rich eventually, the journey is truly more rewarding than the destination.  You will see the world differently once you start trading stocks, everything will become more interesting.  You will feel liberated and empowered.  Life in general will be better as trading forces you to nurture your good traits while starving your destructive ones.  And it is never too late or too early to start.
Adam Hamilton, CPA

Little humility and uncertainty

For those following the investment series on this site, you should read this article in Bear Market Investments. It deals with Albert Edwards judgment as to where the stock market is headed. His assessment, at least in its end point regarding the stock market, is virtually identical to mine.
Sometime we wonder if we are the only ones who are stunned by the ridiculousness coming out of the stock market on what seems a daily basis. Luckily, there is at least one other person out there who, like us, take a bemused approach to the endless insanity. As Albert Edwards says in his latest note: “I’ve been doing this job long enough to recognise when the markets are entering a new phase of madness that leaves me scratching my head with  bemusement. The notion that we are in a sustainable economic recovery is as ludicrous as it was in 2005-2007. But investors are back on the dance floor, waltzing their way towards the next, inevitable implosion – yet another they will no doubt claim in retrospect was totally unpredictable!”
In that vein, it is not surprising that Edwards shares our disdain toward the Chairman:
“Very little surprises me anymore in this business. But even I was surprised by Ben Bernanke?s comment on CBS?s ?60 minutes? that he has ?100% confidence? that he can act quickly to stop inflation getting out of control. Surely if there is one thing Ben Bernanke should be 100% confident about, it is his own fallibility. Remember this is the man who was not only adamant that US house prices would not decline, but refuted the very notion that there was even a house price bubble in the first place! I realise these guys have to pretend that they know what they are doing, but you would have thought that, having been at the epicentre of the biggest economic and financial crash since the 1930s, he would show a little humility and uncertainty. Apparently not.”
But when the entire system, the whole global ponzi pyramid, knows it has no choice but to continue ploughing ahead, as otherwise the consequences would lead to the end of the financial system as we know it, what can one do but join the banks…
“In July 2007, the then CEO of Citigroup, Chuck Prince, told the Financial Times that global liquidity was enormous and only a significant disruptive  event could create difficulty in the leveraged buyout market. “As long as the music is playing, you’ve got to get up and dance,” he said. “We’re still dancing?. This of course was a variant on the Japanese saying “When the fools are dancing, the greater fools are watching.” Well, I suppose if  Bernanke is specifically targeting the equity market with QE, who but the most curmudgeonly bear would not be gyrating their hips in time to the music?
Unlike Ben Bernake, I like to retain some sense of humility. And it’s at times like these that I really start to think I haven’t got a clue what is going on anymore. It really is a mad, mad, mad world. Although on the sell-side I think I remain a lone voice of bearishness, there are other commentators who share my extreme scepticism of the current situation.”

By printing money you will improve the economy

Marc Faber never pulls his punches. Zerohedge provides a summary below. Click on below title to go to Zerohedge site and watch video on Bloomberg. Lots of observations, including investing thoughts.

Marc Faber’s Most Provocative Interview Ever: Compares Obama To A Prostitute, Goes Long Treasurys

Submitted by Tyler Durden

Earlier, Marc Faber appeared on Bloomberg TV, in what may go down in history as his most scandalous interview ever. When asked, in advance of the SOTU address, what he thinks of the president, Faber, who appears to have had enough with all the bullshit, propaganda, and lies, replies: “I think he’s done a horrible job and I think that will continue, I think he is a dishonest person, and nothing has changed… Some politicians are more honest than others. I don’t think that I have a very high regard for politicians, I have a high regard for businessmen and for people who work, and not for people who abuse the system continuously. And in comparison to other politicians, I think he came in on a platform as a president that would want to change the government in Washington, and actually he’s made it worse… We foreigners, we just laugh at someone like Mr. Obama. I was very critical of Mr. Bush, but at least he had one line and he stuck to that line, and at least he set out to do a thing and he was relatively straight on the thing that he did. He may have been wrong, but at least he didn’t change his mind continuously, and didn’t prostitute himself.” If nothing else, how many other people do you know who will compare, in front of a live Bloomberg audience, the president of the formerly greatest country in the world to a whore?
As for what Faber thinks the real state of the union address should be, he says:

“I think what should happen in the US is for the president to tell the US, you have to tighten your belts. ‘We have to go through hard times for 5 years to repair the damage that was committed over 20-25 years by the Federal Reserve, by the Treasury, by the politicians, and somebody has to tell the truth. But the politicians keep on fueling the illusion that you can spend yourself out of the misery, and that by printing money you will improve the economy, which is not the case.”

On the topic of the Fed and relative performance:

You don’t know. Maybe [Bernanke] will resign. After he sees the disaster he has created he may resign. Or he may be disposed, who knows. But all i want to say is in terms of investments we have a very interesting situation, because from the March lows, the EM universe has performed fantastically well, and industrial commodities have done fantastically well, and the US has underperformed everything. And now we have a change: the US may outperform, it may not go up, but may go down less than emerging markets.

On his latest opinion on Treasurys

In the long-run, for sure US Treasurys and most government bonds are a suicidal investment. But as a shorter-term timeframe, and I think for the next three months or so, I think we have a situation where stock markets have become very overbought, and emerging markets in January, most of them failed to make new highs above the November, December highs, and recently some of them have sold off very considerably, plus the Chinese market is giving you a signal that something is not right in the Chinese economy, because it is going down. For the next three months you have to shift out of the Emerging Markets, they may correct 20-30%, out of industrial commodities, on a relative basis. And I think the sentiment, just recently, was overly optimistic on the reflation trade, and overly negative about treasury bonds, so treasury bonds right now are oversold, and as of tonight I got the buy signal on US Treasurys. I think Treasury are the best place for the next 3 months, as is the US dollar. I think a correction is coming in the range of 10% in the S&P and 20-30% in the emerging markets.

On all the current batch of Davos participants:

I dont think the ‘thinkers’ are in Davos. I think it’s a group of liars, and people that go along with the system, and perpetuate fraud and abuse, and dubious practices in the financial system.

As for what he thinks of Keynesianism, and gold, well, we’ll just let you hear that for yourselves.