Sunday, February 14, 2010

How are Markets, the Economy, and Your Dollars Doing?

On January 24th, Clive Maund warned of a potentially "Black Monday" type drop looming in the S&500 Index after the failure of its abortive run up to 115. More interesting perhaps, depending on how much cash you hold, was his second chart showing the S&P500 denominated in Euros instead of dollars. For those unaccustomed to thinking in terms of foreign currencies, a chart of US stock prices denominated in Euros will have the same shape as a chart denominated in US dollars, provided that the dollar/Euro exchange rate does not change. But, if the dollar falls in price versus the Euro, the dollar will buy fewer Euros, meaning a US stock will also buy fewer Euros, and a US stock prices chart denominated in Euros will have smaller rises and larger drops in comparison with a chart denominated in dollars. Accordingly, as the S&P500 recovered from its recent March low, its gain seemed remarkable in terms of US dollars. Over the same time, however, the US dollar was falling against the Euro, making the gain not so remarkable after all when viewed in terms of Euros.

Note, the entire rise shown in the first chart is reflected in the last 1/12th of the second chart, from March, 2009 to date. Not as impressive as a stock chart denominated in dollars. But, there is a nice little run-up at the very end of the chart from 7 to 8 on the y-axis. The very recent sharp reversal and run-up in the dollar against the Euro during as the S&P500 fell sharply from 115 would seem to explain that.

Clive's third and fourth charts show Goldman Sachs and JPMorgan falling sharply at the same time as the S&P500 on high volume.

On February 1, Clive repeated his warning in a longer piece with updated S&P500 and Goldman Sachs charts and more charts, including the: $Gold Index, $HUI Index, USD Index, $Copper Index, and $WTIC (Light Crude Oil) Index charts. Markets could be on the verge of repeating last year's crash or worse.

On February 15th, Clive posted a "Gold Market Update" on the 321Gold Website (one of my favorites). The articles Clive publishes publicly come out a few days after he publishes them for his paid subscribers. This article was originally dated February 13th. His latest opinion is that the recent corrective phase in gold is over, and we are on the verge of another big run-up in gold. He might be right, however, I would still advise caution. Clive tends to get over-optimistic and over-enthusiastic about gold sometimes. Also, he is a practitioner of "technical-analysis", the method of divining the future from the stock chart itself. While the stock chart itself can provide useful information about timing short-term and sometimes intermediate-term buys and sells, it cannot reliably predict more than that. If the Dow, S&P500, and NASDAQ head south, they will drag precious metals stocks and the metals prices themselves with them, no matter what the precious metals technical analysis says. One way to play this is to buy several gold and silver stocks, and hedge them all by also buying SPY (S&P500) put options.

On February 7th, Bob Chapman touched on a wide variety of issues pertinent to Gold, Silver, the Econonmy, and More, including: the upcoming second wave of mortgage defaults, the real unemployment rate, foreign buying of US Treasuries and Agency bonds, a hint that the Government is planning for some kind of forced retirement plan where citizens would be required to exchange some part of their retirement savings for a Government guaranteed annuity, the role Paul Volcker might play in helping return the financial sector to some semblance of former normalcy, financial industry front running, the increases in the national and Federal Reserve debts, and on the "bright side", mention of an uptick in mortgage applications and a slowdown in job losses.

Recently, Daniel Amerman, addressed the issue of inflation versus deflation in this article, "Containing Inflation Via Unlimited Money Creation: The Fed's Strategy". Currently and for quite some time, two camps have been debating this issue of whether the current monetary system will suffer a deflationary depression or a hyperinflationary depression.

In a deflationary depression, debt is repaid or defaulted upon resulting in wave after wave of bank failures and a contracting money supply but the currency does not fail; the dollar becomes more valuable. In a hyperinflationary depression, expansion of the money supply and leads to runaway inflation and failure of the currency, because the dollar eventually loses all value.

The reason people are arguing about which way the monetary system and economy will go - deflation or inflation - is that the Government and the Fed have propped up the financial sector by exchanging Government and Fed debt instruments for bad assets belonging to the big banks, Government Sponsored Enterprises (GSEs - think Fannie Mae, Freddie Mac, etc) and Wall Street firms. On paper, these exchanges led to large increases in the money supply leading many people to think that high inflation is right around the corner. At the same time, banks have been reluctant to lend, and borrowers have been reluctant to borrow and spend, meaning the new money has not found its way into the general economy in a big way ... yet. While this money sits in the coffers of the big banks, businesses and people are trying to pay off existing debt, that extinguishes money, and is deflationary. So, at the same time inflationary forces are at work, deflationary forces are also at work and opinions vary as to which forces will predominate and when.

Daniel explains how the Fed and Ben Bernanke are handling their part in this story. In short, Ben Bernanke thinks he has a strategy that will allow him to control the vasts sums of money created by the Fed, prevent its escape into the general economy, and thereby prevent hyperinflation. Daniel explains the risks of Ben's plan and begs to differ. In my opinion, this is an area where I don't think the future is ordained yet, and future decisions that will be made by the Fed and our Government might well determine the outcome. I think the best plan is to hedge your bets no matter which way you think the dollar is going, but you should read the article to understand the economic and political issues better.

While obviously not a total secret, the opening of this article, Secret Summit of Top Bankers, by George Lekakis and Fleur Leyden from the Herald Sun, February 06, 2010, pretty much explains its importance:

"The world's top central bankers began arriving in Australia yesterday as renewed fears about the strength of the global economic recovery gripped world share markets. Representatives from 24 central banks and monetary authorities including the US Federal Reserve and European Central Bank landed in Sydney to meet tomorrow at a secret location, the Herald Sun reports. Organised by the Bank for International Settlements last year, the two-day talks are shrouded in secrecy with high-level security believed to have been invoked by law enforcement agencies. The event will be dominated by Asian delegations and is expected to include governors of the Peoples Bank of China, the Bank of Japan and the Reserve Bank of India. The arrival of the high-powered gathering coincided with a fresh meltdown on world sharemarkets, sparked by renewed concerns about global growth and sovereign debt."

The significance of this meeting in light of recent news, the apparent topping behavior of stock markets, and the recent sharp drops should be obvious. The banking elite are very concerned about how to manage the looming crisis should markets take a another dive like they did last year. If all was well in the financial world, a meeting such as this would not be taking place.

My favorite quote concerning "secret meetings" like this goes, "If you are trying to find a cure for cancer, you do it with the lights on." In other words, if you are truly engaged in activities that will benefit all of society, wouldn't you want everyone to be aware of your good deeds? Call me a cynic, but in my opinion the central banking elite are meeting to figure out how to save their bacon, not mine or yours.

Friday, February 5, 2010

What's Wrong with What's Wrong Articles

West Coast Wasteland, by Sasha Abramsky, January 21, 2010, is a very good article on what’s wrong with California … except, there’s something wrong with it. Sasha does an excellent job covering the devastating the effects of the "Great Recession" on the Golden State, and in Standing Up for Change, she very responsibly points out the major populist efforts afoot attempting to make California’s problems right. No, my problem is not with what she wrote; I read both articles with interest.

It is just that the first article is typical of a multitude of articles currently being published on every entity experiencing financial problems, describing the effects of what the: Federal Government did wrong, on what Bear Stearns did wrong, Lehman Brothers, AIG, Merril Lynch, Washington Mutual, Fannie Mae, Freddie Mac, General Motors, all the major banks, the Fed, nearly every State and local government in the country, individual investors, homebuyers, European banks and governments, Japan, China, Russia, Dubai, etc. The list of people, groups, and organizations with financial problems is endless. It's almost like the days after 9/11. Oh my God, look at that, and that, and that. And, not enough how and why.

Truth is, well before the financial crisis of 2007/2008, it was understood that California had problems. So did many other states. But, it is hard to make changes while the “good times” roll. Stock markets were rising. Credit was available to states, corporations, and individuals. A rising tide of expanding credit lifts all boats. No one wanted to listen to prophets warning of danger ahead. Then along came the financial train wreck that brought the long party of the 80’s, 90’s, and 00’s to an end, with massive damage to balance sheets across the board: banks, corporations, federal, state, and local governments, individuals, etc.

Did California break the financial system, or did the financial system break California and just about everything that depends on steady money flows, all at once? Is it really possible that every person, every business organization, every level of government screwed up simultaneously and nearly destroyed the world financial system and world economy? Or, was there an actual epicenter to this crisis from which the problems emanated?

Sasha wrote, “There's not only no will to modify the residential property tax constraints imposed by Prop 13; the majority also opposes a "split roll" property tax that would allow for commercial properties to be taxed at a higher rate." Sure, any number of individual issues contributed the State's specific problems, but is California in trouble because of the likes of Prop 13, or was Prop 13 a reaction against the real problem that caused the current financial and economic crisis? Sadly, it is unlikely that Sasha or more than a very few writers at this time can connect the dots between this mundane observation about property taxes and the financial problems afflicting “developed” nations worldwide.

Simply said, Proposition 13 was a reaction against relentless tax increases on homeowners caused by inflation, caused by the very same Fed, major banks, and Wall Street types responsible for the current financial crisis. If excessive credit were not relentlessly expanding the money supply, and the banking industry were not so thoroughly deregulated, there would have been no stock market bubble, housing bubble, no subprime crisis, no derivatives blowups, toxic assets, outrageous increase in the national debt, etc. California homeowners finally said, no more unlimited property taxes based on inflation beyond our control. But, they had no control over much else the state and national governments did, or the Fed, the major banks, Wall Street, and the rest of the crew responsible for relentless inflation.

No, there is no excusing the State Government of California’s poor financial condition. It’s consistently ranked near the top if not the top of all U.S. States in financial trouble. It was already making plenty of its own mistakes before the financial crisis hit, but there is a difference between walking near the edge of a cliff and being pushed off. California Government is definitely not wearing the white hat, but it is not wearing the black hat either. Call it dark grey. The folks wearing the black hats are: the Fed, the banks, Wall Street, and our very own Federal Government, with the monetary system at epicenter of the financial earthquake.

I have dear relative who took issue with my claim that the cause of the crisis was and is not well known. She said, "Why, everyone I know saw it coming." But, she is very smart, well educated, well read, perceptive and hangs with similar people. She's not typical, while I teach high school, and I can say with confidence that the number of teachers and students who even suspect the source of our problems, let alone understand it, is one in a hundred. We need more people writing about it. We need more people involved in the national populist movement to reform the national monetary system.