Category Archives: Investing

The case for inflation

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The following are responses that Richard Maybury gave in an interview with Investor Insight.

He makes a case for the coming of a great inflation. We haven’t seen the beginning yet as we are still going through a process of de-leveraging.

–Article–

Obama is a boomer, and I think an understanding of the boomers is a valuable tool for seeing what is coming. Boomers were raised in government-controlled schools and colleges where they were taught Keynesian and socialist economics. Neither Keynesianism nor socialism contains the concept of malinvestment, meaning the distortions caused by the government injecting massive money into the economy. These two forces, the injection effect and malinvestment, are the foundation of the economic crisis, and I’ve never heard Mr. Obama or his advisors say anything about them.

Money responds to the law of supply and demand just as everything else does. When the supply of dollars goes up, the value of each individual dollar falls, and prices rise to compensate. That’s inflation. Inflation isn’t rising prices. Inflating the money supply causes rising prices.

As prices rise, people become poorer and they demand relief. The politicians stop injecting money, people have less to spend, and business slows down, often causing a recession. The shakeout can be very painful, depending on how long the inflation has lasted and how many new dollars have been injected into the economy.

The government has only two ways to finance its spending — taxes, and printing money. Seven years ago the White House and Congress decided to finance the war by printing dollars instead of raising taxes. According to the St. Louis Federal Reserve’s MZM measure of money supply, the number of dollars circulating in the US on 9-11 was $5.3 trillion, and now it’s $8.7 trillion.

What is generally overlooked is the fact that the Federal Reserve has been inflating the money supply almost without pause ever since the Fed was created 94 years ago. So, underpinning the most recent seven years of injections and malinvestment, we have the residual from the previous 87 years.

Remember that I said events will control Obama much more than Obama will control events. Ever since the Great Depression, the way the federal government has dealt with shakeouts has been by re-inflating. They halt recessions by expanding the money supply further, which stops the shakeout. But that leaves a lot of bad investments in place, and it also creates a lot more. Of course, the so-called rescue pushes the day of reckoning into the future.

The interview continues and he mentions that eventually as the reserve currency the United States will have to do something to regain support of the dollar. He proposes this will be done through a return to the dollar being backed by some basket of currencies. Something will have to be done if the dollar isn’t to be completely destroyed. The entire interview is worth the read. Here it is: Interview.

Retirees are a threat to the markets

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Retirees a threat… reading that sounds absurd to me. However, take a moment to think about it. Say I’ve been putting money into my retirement savings for many years and I’m about to retire. The general prescription for retirement accounts is a variety of approved funds, unless you’ve elected to go with a self-directed account. Last I checked most are down by 20% or more for the year.

Imagine being in your late 60′s and watch 20-40%+ of your wealth vanish. Whoa… what do you do?

1) Keep your money invested because you hope the balance will recover
2) Sell to get cash so at least you can survive the future

Regardless you will be selling as time marches on to fund your retirement. As the market continues its descent and people’s frustration and anxiety grows the propensity of panic will grow as well. People aren’t panicking yet. They are anxious, full of anxiety, and want help from the government or at least some accountability. Once the people still holding on just want cash then we will see a capitulation pushing all the indices down further. Will there be bear market rallies… YES! We have already seen many.

The chop over the past couple weeks is forming a bit of a channel as the bears and bulls fight it off. People wanting to enter the market long in hope of hitting the bottom only sell at a loss later when the market continues it primarily downward trend. I’d love to say there will be a major (SUSTAINABLE) rally, but look at all the economic news. Citi laying off 50,000 people worldwide… WOW! If that isn’t yelling recession then umm I don’t know what to say.

Okay let’s pull this all together. Really bad economic news on many fronts all around the world. A large percentage of the US population is about to retire. The retirees are depending on their savings to retire. They face a choice of either holding on until they no longer can if things continue to deteriorate, or getting out now. Either way there is a downward pressure that the bulls will have to push through to rally for any serious amount of time.

Stocks for the LONG LONG LONG term

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“The best therapeutic move for long-term investors is to turn off your TV so as not to get caught up in all of the sensational headlines. The stock market has been and will continue to be the best source for wealth creation over the long-term.”

–Patrick J O’Hare, Briefing.com

I love hearing that the stock market for the long term is the way to make money. Close your eyes and prey. Whoa… Did you close your eyes and watch the money flow into your pockets when you labored every day for what you have invested?

What happens if you are in individual stocks and some of them go bankrupt? The indices adjust and find another company to take the failed ones place. Yes, the market has gone up in the long term, but what if you invested at one of the tops before the crash and had to wait 16 years to get your money back? I don’t know about you but I’d rather sit on the sidelines and wait it out. There are ways to see the hurricane of in the distance, but if you are unwilling or unable it will hit you.

When Columbus was making landfall the natives didn’t see his ships because they weren’t part of their reality. If we can’t adjust our thoughts to accept something new or different then how are we going to prepare for a possible change of future direction?

Read the following article… There is a grim reality facing us all. Investment banks have used up their ability to lend to businesses. Considering that the growth of our economy depends on the ability of credit we are facing a MAJOR did I say MAJOR issue in front of us.

Money Central Article

I’m also hearing local news radio having discussions about what to do with your money to keep it safe. Last night I heard someone saying that this is the time to start thinking about buying. Sure there is the old adage that when there is blood in the streets buy. When if the blood is only at a trickle when it will be a river?

After the Bell Part (2) – Paulson

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Secretary Paulson just issued his press release and I gained absolutely no confidence in the current situation.  Actually I’m more concerned than before as he said that the “banking system is safe and sound“.  Will someone please tell me how the banking system is safe and sound when major institutions are failing?  Bank of America was just downgraded, which shouldn’t be surprising as Merrill (MER) isn’t in good shape.

So, Paulson’s main theme of his speech was that confidence and resilence in the economy is strong, and that they are working to maintain the stability of the markets.  He doesn’t take lightly putting the taxpayer on the hook for private institution’s mistakes or overindulgence in risk.  So, taking over Freddie and Fannie wasn’t putting the taxpayer on the hook.  Well, there wasn’t anything he could do about that because they were part of the hand he was dealt.  It was a congressional charter that mandated that takeover.  I see…

He mentioned that we needed major authorities to wind down major institutions such as Lehman (LEH).  I’m not really sure what that means, but to take a guess it means that other institutions are going to eat those about to fail.  Okay that makes sense, but it is starting to all look really fishy.  How many institutions are going to consolidate?  And which ones are going to survive and who chooses?  This is not how a free market works.

He also mentioned that additional regulations and authorities will be needed in the future.  More government regulations!  Yippie I can’t wait.  We’ve seen how well those work.

And last but not least there was absolutely no mention as to how we got here even though the question was asked numerous times.   Not once did he mention the loose monetary policies or the relaxing of required bank reserves or increasing of the GSE’s maximum loan size.  

If this isn’t a RED flag waiving in the wind saying get out I’m not sure what is.  Be ready for flows of money to start leaving the United States as people won’t want to hold dollars.  Initially, we are seeing a rush to safety in treasuries as their interest rate is falling, but if this continues people will flee to other currencies and hard assets.  Why hold a piece of paper that isn’t worth anything?  Once the confidence leaves the system it may be too late.

Probable Future Outlook for the United States

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What concerns me most is looking at the highly probable future outlook…

The gov’t is looking to bail out the Freddie and Fannie (dependent upon congressional approval), which will help out new, but not existing home buyers. By adding their debt the gov’t is using our tax dollars and inflation adjusted dollars to secure them. However, we are projecting a $500 billion dollar short fall this year in the budget, and the national debt is at about 9.7 trillion, and growing ever so rapidly. If we tack on unfunded liabilities now we are talking anywhere from 50-70 trillion in obligations. Effectively the government is insolvent. Now what happens when the gov’t revenues begin to decline due to the slowing economy, baby boomers starting to take their retirements, baby boomers soon to be taking Medicare, and the continuation of the Iraq war / Afghan war / maybe Iran war?

I’m failing to see the light at the end of the tunnel.

Consumers purchased houses as money was cheap. Everyone felt rich so they purchased more consumables, which had no productive value. These weren’t investments into something that would have future economic value, but only immediate gratification and immediate depreciation. Look at who is producing and who is consuming… we in the USA are primarily guilty of the latter and it is all funded through the rest of the world’s savings. At some point the rest of the world is going to tire of this. Then after our HELOCs were maxed out we started to use our credit cards.

What happens if the United States dollar loses its status as the reserve currency? Then everyone with dollars will flood the markets and purchase any tangibles possible. Money is a commodity just like gold and silver, but it can easily be created. However, due to the nature of its existence it is a exchangeable commodity and considered legal tender. As people want dollars the price rises and as people desire them less the price falls. Why would anyone want dollars when you look at the future for the US economy besides necessity and political reasons.

People are already losing their HELOCs because banks are worried that consumers won’t be able to afford them. Legal or not this is happening. I also heard from a Real Estate agent in Seattle that banks are asking for 25% down on new mortgages.

In an earnings call in late January 2008, Bank of America executives said credit card delinquencies in California, Florida, Arizona, and Nevada—states with high foreclosure rates—increased five times as fast as in other states, suggesting that consumers struggling with their mortgage debt are also finding their credit card bills hard to pay. “We’re focused on getting paid for the risk we take,” said Joe Price, chief financial officer. – US News and World report 2/28/2008 — Link to the story

The GSE bailout will help to prolong the issues that the financial industry is facing. The USG will do everything in its power to support the system through its tax system. It also gives individuals and institutions more time to pull their money out of the dollar. An immediate collapse would make that very difficult and costly.

And Gary North just posted this lovely article that illustrates that nobody has a clue as to the extent of what is really going on. Link to the article Unfortunately this is for members only, which I highly recommend subscribing to. I don’t get paid a dime on referrals.

I’m getting the sense that things could get a whole lot worse than any of us imagine. In that case I’d consider moving out of the county. Sure the dollar is rallying, and commodities are falling, but how long will this last? Peak oil has passed so we are biding our time before demand outstrips supply. Without oil or with really expensive oil life becomes much more difficult. Panic would ensue in the streets.

For those of us who believe in the concept of revision to the mean take a look at the Case Schiller index since 1890. Looking at the graph we have never seen housing prices rise so dramatically so quickly. Every boom period was followed by a bust or contraction and revision to the mean. We are beyond the mean… we are in outer space. Thank you Fed for the cheap money, and for removing banking reserve restrictions, and inflating the money supply. Hey it had to go somewhere and housing seemed the place to be. Then it went to commodities, which are now taking a fall as well. However, I see no reason that the long term forecast for commodities won’t be higher. The commodities I speak of in this case are precious metals, petroleum, and food. Essentially all the necessities to keep the world moving.

As for housing it will have to come back down to reasonable values. If we encounter a period of hyperinflation then housing will be a good asset to hold onto. However, if we have a depression I could argue the opposite. In a depression the purchasing power of your dollar increases. Depression means contraction of the money supply, which isn’t necessarily a bad thing. In fact part of the Fed’s charter is to contract the money supply when needed, but that hasn’t been the case as of late.


Full Story from Mises.org

And what’s next? Commercial Real Estate?
NEW YORK: U.S. commercial real estate prices are likely to tumble over the next 12 to 18 months as more borrowers default on their loans and regulators crack down on banks, pushing even more properties onto the market. Since the market’s peak in 2007, the availability of debt – the lifeblood of commercial real estate – has dried up and choked off sales.

Borrowers have resisted selling because of falling prices. Banks have not sold off their troubled loans, fearing a huge write-down of all commercial real estate loans. But it looks as if the clock is running down. “We’re going to see a whole lot more trouble going forward,” said Peter Steier, vice president of Inland Mortgage Capital in New York.
Link to the article

It continues:

Commercial real estate sales in the United States are expected to fall 66 percent this year from $467 billion to an estimated $159 billion. This is because debt, especially securitized debt in the form of commercial mortgage-backed securities, or CMBS, is either unavailable or prices are too high and the terms too strict for borrowers, Reis said.

“One of our biggest problem areas is pretty much the state of Ohio,” said Kevin Donahue, senior vice president Midland Loan Services, a CMBS servicer that steps in when a loan is showing signs of imminent trouble. “If we keep going, by the second quarter of 2009, I think the entire state of Ohio will become a subsidiary of Midland.”

I discoved this last bit from Chris Martenson @ www.chrismartenson.com.

Fannie Mae and Freddie Mac… A governmental department

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I was originally going to write a post about how we always hear about the “New World Economy” prior to any boom / bust period.  This time I think the rules have finally changed as the United States is losing if it hasn’t already lost its status as the number one superpower, we are now the largest debtor in the world, and continuing to bail out thee who fails.  

Whether or not this time is different and we will recover is debatable.  What concerns me is the continuation of the Feds backing up private industry.  Had the United States government let Fannie and Freddie fail what would have happened?  Well, the stock market would have surely taken a tank, interest rates would have gone up versus dropping about .5%, and the dollar would have probably fallen dramatically.  

So what do we get?  – The Dow rises 290.04 points or 2.58%, the NASDAQ rises 13.88 or 0.62% and the S&P rises 25.48 to 2.05%.  Wait a minute here… The taxpayers meaning you and I get to foot the bill for this.  At a minimum the treasury is ready to pump in $100 billion into each company… oh wait are they really companies or departments of the government.  I guess that is up for the next presidency to decide.  Nothing like passing along the responsibility of the crisis.  

So, I present a question about all of this.  This being the cancer’s on the balance sheets of financial companies, a negative GDP that is still positive according to the gov’t, a extremely high CPI, and declining production and consumption.  

– Is it possible that we are going to see extreme volatility in the markets until the elections?  Probable, but as we have seen with every governmental intervention since 2007 there is a quick boom, and then continuation of the contraction.  Contraction meaning declining stock market prices.  The USG lagged in making a decion on the Fannie and Freddie debacle due to the upcoming election.  The longer they take the closer the election takes place.  Due to the recency effect people recall things closer to the present then the past.  Let’s just say that the economy looks somewhat okay going into the election.  What are the odds that McCain will have a better chance of winning over Obama?  Considering the past two elections…

I didn’t mean for this to go into a conspiracy theory or that I believe there is manipulation in the markets, but nothing seems to make sense at the moment.  What does make sense is that my dollar is losing its purchasing power, my condo is declining in value, prices are rising, and the US is bankrupt.  Oh but wait we can continue to print dollars like in the Posted in Debt, Economy, Federal Reserve, Finance, Investing, News, United States Dollar | Tagged , , , , , , , , , | Leave a reply

GDP growth 3.3% annually? Up from 1.9%? Right…

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GDP cries foul!

When the numbers emerged today I was shocked. After my initial amazement sunk in I started to wonder what was “really” going on here…

My eighth grade science teacher (yes 8th grade was a long time ago) managed to prove through statistics that I and everyone else in the class didn’t exist. Fishy indeed! If I didn’t exist according to statistics, but was still sitting in the classroom with the other student and the teacher himself then one of two things were completely incorrect. One might have been an illusion (think The Matrix)… Well, we know it was the stats because I’m sitting at my computer writing this entry.

So, if we can prove something doesn’t exist through statistics, which are really just a mathematical representation of data, can we manipulate our results through statistics?

I highly doubt that the GDP is actually positive. Take a look at shadowstats.com, which undoes as much of the governmental massaging of the numbers as possible. At the moment we are actually at about a 9% annualized rate of inflation, and GDP is negative. Wait, GDP was just shown to be 3.3% annualized… again what does this all mean?

What recession?

We aren’t in a recession or at least that is the official figure. Of course we aren’t because to be in a recession requires two consecutive quarters of negative growth. Remember: We are in an election year! Interestingly according to shadowstats.com, we have had a negative GD since 2004.

I’m just skimming the surface and attempting to draw to your attention that what you see isn’t necessarily what you get. We are in a recession, and have been in a recession for quite some time now. However, the government wants us to believe that everything is okay, and that the economy will recover. My fear is that all this manipulation will lead to an even larger bust.

Look around you… are you seeing more for-sale signs of homes, more for-lease signs around town, people shopping less, more concerned about their jobs, etc…? These are not signs of economic growth, but fear.

So what?

Let’s make a prediction as these are always fun. If I’m right I get to stroke my ego a bit, and if I’m wrong… well I’m wrong.

The manipulation will continue as long as possible, but the market will prevail. Once it realizes the degree of major contraction in growth and productivity people’s sentiment will further shift as it is starting to now. Spending will dry up, credit won’t be lent, defaults will further, housing will keep falling, the US stock markets will free-fall, the dollar will resume its decline, and gold, silver, and commodities will eventually resume their bull market. Wow that is a mouthful. Might I be wrong…? Of course! If I could predict the future I would own an island and call it Gauntlett.

The election…

I’m going to go as far as to say that our markets are severely manipulated NOT by speculators, but by various government officials and policy. Going into the election with a perceived strong economy will give the incumbent’s party an edge that just might help them stay in office. We will know in November. After November the Fed won’t need to have such a loose monetary policy and might start to think about inflation and raise interest rates if the market doesn’t demand it sooner due to the risk of inflation to your savings and purchasing power. (Note: I didn’t say higher prices because what is really happening is your dollars are becoming worth less as more are put into circulation by the Fed.)

Questioning Your Investments

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So, investing is an art form much like any of the other “things” we do in life. If you are a musician you must practice until you become proficient, and then to become a master takes many years of dedication. Even then there will be people above and below you in terms of proficiency and skill, but that doesn’t mean you aren’t great.

As each day passes I look to myself trying to figure out what investment style will suit me best, and I’m coming to the conclusion that an intermediate to long-term perspective will probably be best for me at least for now. That doesn’t mean that short-term trading won’t be a part of what I do, but it will be minimal.

Why? Well, the longer-term trends make more sense. Say for example with our current credit crisis at hand. The USD is being devaluated at an alarming rate. As the Fed continues to pump money into the system (mind you it is created out of thin air) thus each dollar is worth less due to there being more of them in circulation. Well in that case what do you do if the dollar continues to fall? Well, purchase other currencies that you think will be stronger against the dollar and / or purchase commodities as they are valued in the dollar. As the dollar weakens the commodities go up in value. However, you have to be careful as you are also dealing with supply/demand issues when it comes to raw materials. To say there are hard and fast rules is dangerous. For example while it may be supposed that an increase in gold is a indicator that inflation is coming, to abide by that rule in every situation may get you in trouble.

Okay so I’m almost finished with Harry Browne’s Investment Strategy and wanted to write about the questions we need to ask about our investments and the questions we normally ask, which lead us astray.

1) RISK: Is there any risk?
Well there is always risk in any investment. The only risk-free investment or the closest thing to it is T-Bills, which is considered the risk-free rate.

If risk is inherant in any investment then what?
1) What economic conditions will cause the investment to decline in value?
2) Are any other investments inversely correlated with this investment to compensate for its decline?
3) What is the most you can lose? (Generally this is 100% of what you put in, but remember that if you are using leverage you can go beyond 100%. Imagine futures for example and you are locked limit down if you are long. You can’t get out and may end up having to pay your broker even after your sell.)

Safety: Is this investment safe?
Well, safety is somewhat misleading. The cash in your bank account is safe as long as your bank doesn’t collapse, and if it does hopefully the FDIC will have enough capital to guarantee your account. But say inflation is at 10% and you are earning 3% interest your capital is depreciating at 7% per year. Yikes!
1) Under what circumstances would I lose a substantial portion of my capital — say 20% or more?
2) What would cause my entire investment to be worth nothing?
3) Can I lose more than my investment. (See #3 under Risk)

INCOME AND CAPITAL APPRECIATION: What is the investment yield?
Your investment can appreciate in 3 ways (sometimes a combination of a, b, c):
a) Price appreciation
b) Interest earned
c) Dividends

Also, there is a tradeoff between income and appreciation with regard to taxes. b and c provide immediate income with a tax liability, while a also provides income, but taxes are deferred until you sell thus generating income.

Chasing high yields means chasing a risker investment as the general rule is that the higher the yield the greater the risk. So, if a T-Bill is yielding 3% and a corp AAA bond is yielding 6% the corp bond has a greater risk of default. I’m not saying that the corp will default, but the possibility is greater. Also, with high inflation purchasing a bond at 6%, while inflation is at 12% means as I stated earlier that you are losing money.

1) Under what circumstances, if any is the investment likely to appreciate?
2) Under what circumstances, if any is the investment likely to depreciate?
3) In good circumstances for the investment, will the overall return — yield plus capital appreciation — help your portfolio?

Note about mutual funds: You want the fund paying the lowest yield. Any dividend paid simply reduces the price of the fund by a comparable amount. You also have to pay taxes on the dividend, whereas it could have stayed in the fund invested being compounded.

TRACK RECORD: How did this investment perform in recent years?
Investments go up and down, the economy expands and contracts. There is no written rule that says if it has been going up for the past number of years that it will continue to do so in the future. You may be buying at the top and selling at the bottom. The same may hold for an investment advisor. They may be hot, and by the time you invest with them they went cold.

1) What kind of economic climate should cause this investment to prosper. (IE: Inflation and Gold)
2) When the climate HAS existed, DID the investment prosper?
3) If this investment is for a balanced portfolio will it give you too much exposure to one category of investments?
4) If this is a speculation, do you think we’re heading into an economic climate favorable to this investment?

SPONSORS: Who things this investment is about to rise?
Nobody can predict the future! I don’t care what anyone says, but they can’t. All we have a various indicators, past events based on similar circumstances, and the moon!

1) Why is this person recommending the investment? Do their arguments make sense?
2) What do they believe it will add to your portfolio?
3) What will have to happen for their forecast to come true?
4) Do you want to bet on that event with funds you can afford to lose?

TAKING THE PLUNGE: How much should I invest?
Nobody can tell you how much to invest because we all have different objectives, and risk tolerances. I will say however that for risk management Van K Tharpe has some helpful information. One book I would recommend in this area is Trade Your Way to Financial Freedom.

Balanced Portfolio:
1) How much of the investment do I need to provide the proper balance against my other investments?
2) How large of an investment would overexpose me to some potential event?

Speculation:
1) The entire investment could be lost. How much can you afford to lose?

TAKE OVER CANDIDATE: Is this company a potential takeover candidate?
If you are acting on the possibility of a takeover or some other event materializing such as a product being successful… if it doesn’t happen there will most likely be a drop in its price as it failed to meet expectations.
1) Do you interpret the widely known information different from what most people believe?

Investing with the crowd isn’t much of a profit maker. Generally the price of the asset already reflects what is widely known. Therefore if something is out of favor or not on the radar screen of everyone, if it performs you could make out quite well. ie: where will the next bubble be? Can we say the green movement?

Unpopularity isn’t a guarantee of profits, but it is a prerequisite.

POPULARITY: If this investment is so good, why don’t I see it recommended in newsletters or Money magazine?
1) If you are discussing an off the radar investment with someone are they trying to help you decide if it is right for you? Or are they simply guessing that the investment will go up in price?

If the latter ignore the price — remember the future is unknown.

TECHNICAL ANALYSIS: Do the technical factors favor the investment now?
Technical indicators have a chance of being right or wrong. There are a vast number of indicators people believe in. Some may be correct due to the self-fulfilling prophecy. If enough people believe in them and use them to trade or invest then they will exist.

1) Is there something more interesting on TV that in the charts?

SUMMARY:
You must be able to define what you are trying to achieve. HAVE A PLAN! Without a plan you will be riding a very large wave without anyway out, only to later be crushed. To have a plan will enable you to ask the right questions. A plan also will enable you to evaluate what you see and hear. Lastly, you will be able to decide if an investment is in line with your goals.

–Most of this was a paraphrase of Harry Browne with a few of my opinions added in. Most of it is common investment wisdom, but alas from what I can tell most of us are looking for the Holy Grail. Van K Tharpe talks about the Grail… It isn’t what you think. There is no magic answer, there isn’t a system that is fool proof, and again we can’t predict what will happen with certainty. Good Luck!