Overextended…

Posted on June 15, 2009 by TheGauntlett

… is exactly where the market was back in March when the S&P 500 hit 666. Everyone thought the world was coming unhinged, and well it was and still is. However, not everything comes tumbling down instantly.

With every play there are acts, and at some point the climax. Without the climax how can we have resolution? They are conditions dependant upon eachother unless we are speaking of the experimental genre. With our money supply and government expendatures into the stratosphere we may be in the experimental, however let’s stick to the traditional for our discussion.

As this drama plays out I think we will have the main plot divided by smaller and yet smaller sub-plots each with their own climax and resolution.

While the market tops and is due for a correction we are jumping for joy at watching green shoots emerge from the abyss. The media and figureheads talk about these shoots sprouting from here and there, but I don’t seem them. Withered shoots perhaps.

Let’s introduce the buildup to the climax, and considering the climax euphoric the buildup sets the stage for euphoria. In our case hope. Beyond oversold conditions that we reaached in March we also had hit a stage of dénouement (catastrophy). However, this was only a subplot as if it had been the true bottom we would not have seen a short rebound in prices that have taken us up over 35%. We needed complete disgust with the markets and an unwillingness to jump back in, which we didn’t see.

Instead will we go from Climax (the present) to catastrophe and back again I imagine a few more times before this is over. We are fairily resiliant beings and can stand being pushed, pulled, and battered a bit before we completely throw in the towel.

We are now starting a push into anxiety as the green shoot euphoria wears off.

Where are we going?

If the past is able to predicate the future, and if we are playing out subplots within the overall plot that leaves us with a theme of euphoria, despondency, optimisim and so on. With despondency we will need to see disguist, lack of conviction in the government, and a swearing off the the financial markets. We aren’t even close.

Meanwhile as we go through these girations, while the Alt-A mortgages readjust, and commercial real estate weakens I’m expecting to see price fluxuations, and gyrations that flow with human emotion. After all with so many players the markets are more emotion driven than anything else.

If the markets weren’t emotion driven then how can we explain people buying equities when the P/E ratio of the S&P500 is over 100, or how technical traders use patterns to profit? After all we humans tend to do the same thing over and over again. History repeats whether we like it or not. The Romans clipped gold coins to fund increasing government expenditures, and in the modern era we print. Nothing has changed except the means in which it is accomplished with the same outcome.

*******

Short-Term:

A recovery in the dollar based on nothing more than everyone else is hurting perhaps worse than us, and it is very oversold. Bernake and co might pull-in some liquidity to lessen foreigner’s fear of a devaluing dollar to support our debt markets. This however, will undoubetly cause a collapse in the equity markets, commodities, and precious metals, while the dollar will rally as will bonds.

Winners: The US Dollar, Bonds

Losers: Everything else — Note: I’m cautious in shorting commodities due to when the next scenario will hit.

Intermediate-Term:

As liquidity is reduced Bernake will realize if he hasn’t already that there is no way out and that we will never be able to repay our debt. The only way out will be a default via inflation, but that will prove futile once inflation hits 20%. Wages will not rise and people will protest. A depression will follow.

Winners: Precious Metals, Raw Commodities, Real Estate

Losers: Everything else

Longer-Term:

We will survive, and I hope we will change our ways to more responsible Americans. The case for responsibility is huge as it has gone by the way side. Instead of takeing care of ourselves, we look to others to make our decisions, pay for our health-care, take care of us in retirement, and essentially wipe our asses. Fiscal responsibility needs… needs to happen. No longer can we live off of debt that has we have no way of repaying. I’m sorry, but a hummer purchased via your HELOC adds no value to your income. Hence it is a poor investment and you must increase your earnings in other areas (no, housing doesn’t go up forever).

And here is our reset. The New American emerging from the ashes. This is a ways out in time so we will revisit it as the cycle ticks on.

A bond bubble… Really?

Posted on January 13, 2009 by TheGauntlett

Bonds, bonds, bonds… United States Government bonds ARE the safest investment in the world besides cash. Right? They are aren’t they? I mean they are backed by the taxing power of the United States Government so they have to be. Well, sure you will get your money back at a measly 2.x% these days. Isn’t that below the rate of inflation you ask… why yes it is. T-bills are paying tenths of a percentage so you choose. Besides stocks and commodites have cost many a small fortune so investing in bonds is a wise decision. Right?

There is much talk about a bond bubble, and I’ve been watching bond prices and their rates take off recently and also have a nice correction. Generally I watch $TNX, which is the 10-year government bond yield. Remember bond yields move inversley to their prices. So, if yields go down then prices go up and vice versa.

So, we have seen equity and commodity prices collapse, housing prices, and while that was occuring treasury bond prices have taken off. This MUST be a bubble right? Perhaps, but you have to take into account who buys and sells bonds. We have the individual investor, which makes up a small group. The major purchasers of bonds are large institutions and governments. For institutions let’s look at the money market industry. They must hold a number of bonds based on their funds requirements. For governments they buy and sell bonds all the time. They sell them to raise money and other governments or institutions buy them for a “safe” return.

As a last resort the Federal Reserve will purchase bonds directly, thus monetizing debt (PRINTING MONEY), thus keeping bond prices high and yields low. Therefore bonds aren’t really controlled by investors as we like to think, but much larger fish in the sea.

So, what might we see when the world loses faith in the bond markets? Auctions will be devoid of foreign buyers signaling that foreign demand has dried up. This will spark the necesitated increase in interst rate as an incentive for others to borrow. Simultaneously we might see a flee from bonds as investors are concerned about their future safety.

If you look at the news you will see exports are way down from exporting countries, which means that importing coutries aren’t importing anywhere near previous levels. Welcome to a major recession, yes there are grumblings of this being a depresssion. I supose it depends on your viewpoint. Now what happens when these net exporting countries decide to stop buying our debt because they have their own problems at home and have to use their saving? They will no longer be purchasing our debt, which will make it more and more difficult for the USA to spend, and service existing debt. Being that most of our debt is short term as the interest rate rises so do the debt servicing costs. As these costs rise, tax income decreases then we are stuck with either printing more money (the short and easy “solution”), we cut back on gov’t services, or a combination of both.

Watch out for rising interest rates and a falling dollar. So far we have neither, but once we do this will signal a shift from the US Dollar as secure to the US dollar as a high risk. Expect other currencies in better situtations than us to see their currencies gain value, while the major winners will be commodities and gold.

Purgatory….

Posted on October 24, 2008 by TheGauntlett

Ever watched a sci-fi movie where the crew goes into stasis while they travel from one end of the galaxy to the other? Ever contemplated Purgatory where heaven and hell meet?

I feel as though this is a period of semi-consciousness awaiting judgement… Last night I was catching up on some news online when I was watching the futures markets turning deeper and deeper shades of red. The morning was locked limit down and then we had an immediate spike — DOWN. However, the day is turning out to be mild in comparison to what may have happened.

The reason I label this as purgatory is because I think we are either going to swiftly swing in one direction or the other. Emotion is in control at the moment and perhaps irrational. Once the herd stampedes watch out. If people want cash watch out markets. As I said in a earlier post we haven’t really seen an exodus or pure panic yet.

The news from around the world is to be expected given the size of the credit contraction.

I think we may see a rally, perhaps not today, but maybe next week as people see bargains. News will continue to be increasingly gloomy, spreading a shadow around the world. The contraction will not abate and people in a moment of fear and panic will sell. Hedge funds will continue to implode sending equity prices down further. Mutual funds will have to begin liquidating. The dollar will roar ahead.

Only problem is that we have never seen such a huge monetary expansion. Once banks decide to start lending again that money they are now hoarding and using to purchase other banks will flow into the system. Bam!!@! huge credit expansion at a completely unsustainable rate, and thus hyperinflation. Equities may rebound, but given the recession they will probably be somewhat stagnant as the new capital investment will take time to be realized. Meanwhile, gold, oil, and food will goto the moon as the dollar plummets. Interest rates will also soar as the reality of our debt burden takes hold alongside major inflation. People will want to be compensated for holding a worthless and bankrupt currency.

My only real complaint with this prognostication is strength in the dollar. I’m having a hard time comprehending or even believing that this dollar rally will continue. It is a flawed currency, and has no basis for strength. Then again what fiat currency really has any value?

my2cents

Look both ways before crossing the street

Posted on October 21, 2008 by TheGauntlett

I received an email from a friend and here is my response. You ought to be able to decipher what the questions were about. These are my opinions of the present situation, and are by no means recommendations.

—-
1) Voting for McCain…

I really don’t think voting for A or B is going to matter. I’m voting for Ron Paul because I believe that change has to come from going against the herd. I refuse to be partially responsible for either of them being in office.

The odds are in favor of the democrats getting into office and taking over Congress. I’m actually a bit frightened by this, but either situation is grim. Hopefully it will be better than the last 8 years.

2) Deflation / Inflation
This is tricky and something I’ve been trying to better understand. There are many many many factors at work here. We are headed into a MAJOR recession… thus your cutting spending was a wonderful idea. A recession is a drag on the stock market. Many think that after a brief rally it is going to drop much further. I know you are invested at the moment. One way to hedge against a drop is to invest in a inverse ETF fund such as SDS, QID, DXD, or TWM (these are leveraged 2x FYI). These ETFs have saved me much pain. The overall trend in the market is down. Bear market rallies tend to be severe and swift to the upside, while the markets overall continue to decline.

As for Deflation and Inflation what this means is a decrease or increase in the money supply. Generally during inflation when the Fed is creating money prices of everything goes up because there is a surplus of money that has to go somewhere. When the money supply contracts either by the Fed reducing the money supply or debt is paid off. Then prices decrease. However, under a fiat monetary system credit and continued inflation are essential to keep it up. At the moment with the Fed creating TONS of money we are looking at the potential for hyperinflation in the future, which nobody wants. So, the Fed is walking a tightrope between deflation and inflation. I imagine they will lean towards inflation over deflation ultimately. At the moment we are primarily seeing deflation as prices are coming down everywhere (commodities, housing, stocks).

During deflation the market will come down as will all prices. I think that regardless the markets will continue their descent due to the upcoming recession, decrease in consumer spending, decrease in imports and exports, and increase in unemployment. Once the recession takes hold and the effects of the monetary inflation occurring now start to be felt we will probably start to see increases in commodity prices across the board.b With companies facing difficult times I don’t foresee the created money moving into equity markets.

3) War with Iran
The conflict between Iran and Israel is heating up. I received a report that said Israel won’t be doing anything until after the election, but who knows. In this case we would see the value of gold skyrocket, oil go through the roof, and the dollar go through the floor. This is slowly moving from a remote to more plausible reality. I hope this doesn’t happen as the US can’t afford to be involved in another conflict. We are already spread so thin. Because of this and the enormous debt load the US government (its citizens) now carries I fear for the support and longevity of the dollar. At this point I think it important to own some gold and have some money invested in foreign currencies. <Thank you Gary North and Chris Martenson> These are for the long-term and may lose significantly in the short term. There are many uncertainties at the moment.

Oh and least I forget… At this juncture in the Republicans and Democrats are but different sides of the same coin.

Another bailout, more credit… when will we learn?

Posted on October 20, 2008 by TheGauntlett

It seems that the tune to march to these days is credit o credit we need more credit. Somehow somewhere we forgot quite quickly that credit got us into this mess. If credit is expanding much faster than real economic growth the outcome will be instability in the economy. That is like an individual taking on more debt while their income stays steady or worse is in decline. At some point in the future the debt will become unmanageable. Once debt is too great a burden that individual is going to have to either sell assets to pay off the debt, declare bankruptcy, increase their income, or default. The one thing that makes the government lucky or so it seems is that they can increase “income” through inflating the money supply event hough it is really illusionary. All they have done is take money from every taxpayer to service the ever growing debt burden.

I find it distressing that Bernake and Co. are talking about further fiscal stimulus to the tune of $150 billion dollars and Democrats want double that. We are already over $1 trillion in debt for this year. Where o where are we to find this money? Perhaps a leprechaun will appear beneath the rainbow and we will be saved. If the politicians and bureaucrats have their way this is exactly what will happen.

American’s have no or very little savings to invest in capital goods. We are laden in debt and attempting to service that debt. If unemployment rises substantially then servicing that debt will become even more burdensome. Another stimulus package will probably be used to payoff existing debt, which does nothing for stimulating growth.

So, what do we do… Many have proposed various solutions.

Why not reduce the size of the government for one.
– Yes, people will lose their jobs. However, with time they will find other jobs as that money can now be used for other things.

Reduce taxes, and the size of the tax code.
— Our tax code is way to complicated and confusing. I would love to know the cumulative hours wasted on tax returns every year by companies and individuals. Imagine if we had a flat tax of 10-15%… get rid of tax incentives, credits, exemptions, etc… Not everyone is going to be happy about it, but a reduction in the tax burden in actual numbers and time would enable people to use their money elsewhere and as they choose versus having someone decide for them where to best put it to use.

Return our currency to one backed by a physical commodity — GOLD and SILVER
— The government would hate this, but it would eliminate the major booms and busts and enable constant growth. Money would again have a true value versus the value instilled by the gov’t. Money’s value would be returned to the people and taken away from the money printers, and confiscators of our savings.

Bring our troops home
— We don’t need to be the world’s police. Occupying over 140 countries is absurd and very costly. I agree that we need to have an army to defend the country, but it needs to be defensive and not offensive. Our paws are in too many honey jars. We are bound to piss off the bees, which we are continually doing and then blame them for getting upset at us. Ironic don’t you think.

Remove all subsidies and tariffs
— All they do is distort the market place and what people produce. For example why do we have corn syrup in our soda, but in the rest of the world they use sugar? Corn is highly subsidized, while sugar has many tariffs on it. Corn Syrup is cheaper due to government policy. Corn farmers love this, while it hurts all of us. We pay for those subsidies, and also pay high sugar prices.

I’m going to leave it at that, but there are plenty more options. People say that ignorance is bliss. NO it isn’t bliss it is being LAZY. Will you get out of a parking ticket or a speeding ticket if you claim ignorance? Not unless you are really smooth with words.

What happened to being responsible? If you take on too much debt then you have a problem. American’s have a virus, and it is contagious. We live beyond our means, and then when we get in trouble someone bails us out at the cost of everyone. The one’s who really pay are the responsible ones who are living within their means.

Why Gold?

Posted on October 20, 2008 by TheGauntlett

I agree that we are probably going to see a continued decline in commodity prices especially PMs. However, given the increases in the monetary supply I forsee this trend reversing. When the trend reverses, which isn’t going to happen immediately because we are headed towards a major recession, with unemployment rising, and more likely interest rates as well, inflation will be severe.

The Money Supply graphs are frightening. Once that money goes into the system I wouldn’t be surprised if we start to see hyperinflation. For all of our sakes I don’t want that to happen.

As for investing in PMs I think there are two types of people who purchase them. The first is the speculator, and the other the long term purchaser regardless of price. (I’m leaving out purchasers for industry and jewelry). As much as I don’t like to see the value in relation to fiat currency of my PMs decline my intent on owning them is for more of the oh shit situation. Throughout time gold, and silver to a lesser degree have held up as a store of value. They aren’t going to be worthless as can a paper currency backed by nothing. Politicians and those involved in the government don’t like PMs as they aren’t easily created. Having a currency backed by a scarce resource means that they have to control spending as they can’t print money to pay for various expenditures.

So, why gold and silver? What happens if the fiat currency fails? All of a sudden you and I have a bunch of roman numerals in our bank accounts. Sure we can go get paper currency, but it is better to use as heat. If this happens chaos will ensue until another solution is created or we go back to a currency backed by PMs. I doubt the latter case would occur as bureaucrats aren’t going to want that option.

My other concern is war with Iran, which is looking more and more likely. In this scenario gold and oil will skyrocket. Oil will also be much harder to obtain and the government will probably institute a rationing scheme instead of letting the price rise. I’d rather pay $50.00 a gallon for gas then not be able to get it or to have to wait in line for days. I presume many of you don’t agree, but gas or no gas you pick! Would I drive much NO… however, if I needed to go somewhere I could get the fuel I needed.

Lastely, beyond Gold and Oil we all need food and water. Don’t forget food.

-T

Real Estate, Iran, and The Markets

Posted on October 16, 2008 by TheGauntlett

I’ve been busy watching the markets in the short-term. Is day trading for the foolhardy? Perhaps, but I’ll admit that there is a sense of excitement that is fun. Before you go jumping to conclusions have I actually been trading? NO About the most I’ve done is move a few positions around a bit and make sure that I’m covered on the downside. This market is so volatile, and we are in options expiration week, which just amplifies matters much.

Besides learning about charts and indicators real estate and a possible war between Iran and Israel are on my radar. A while back I sent a question to Elliott Wave wondering if they have done a wave count on the Case Schiller index. After patiently waiting I received a response, and here you go…

Elliott Wave count Case Schiller

Yes, you are reading this correctly in that there may be another 20% decline or more before the housing downtrend finally abates. Elliott Wave is based on Fibonacci and social moods. In many instances they have been spot on +- a bit of time. Additionally, if their forecast about the market is correct the downtrend isn’t complete.

As for Iran I’ll do another post about that. However, if war does break out or a tanker is sunk in the Hormuz Straight a whole host of problems are going to hit the world. For one oil will skyrocket, gold will skyrocket, and the dollar will most likely tank. How real of a possibility is this? Hopefully a long shot.

Look at the Fed Goooooooooooooooooooooo

Posted on October 7, 2008 by TheGauntlett

I found this on www.chrismartenson.com and couldn’t resist posting it here especially after my post about the dollar. How the dollar is going to survive after this much cash is pushed into the system I really don’t know. A inflationary depression seems to be looking more and more likely. It would explain why gold is so scarce on the physical market. People are losing faith in fiat currency and want hard currency that has some store of value. Paper is easily printed, and as Voltaire said

“Paper money eventually returns to its intrinsic value – zero”

Is it just me or is that line going almost STRAIGHT up. If that isn’t a sign of complete and utter panic well I don’t know what is. They are going to put as much liquidity into the system as possible. Will this mean that you house will go back up in value? Perhaps, but your purchasing power will decline severely. Jim Rogers said the US currency is doomed, and I agree. It is only a matter of when, and not if.

The US Dollar gaining? What?

Posted on October 7, 2008 by TheGauntlett

Hyperinflation, inflation, deflation, depression, recession, stagflation… well which is it? I have no clue, but there is a massive monetary inflation occurring, and a looming recession. Hmmm so does this mean a inflationary depression? Yikes.

Last week I took a break from overwhelming myself about the markets and the state of the economy. The timing wasn’t perfect, but I had personal reasons.

Before I start on the quest of exploring our present situation of the potententional…”ion”s I want to make sure we are on the same page. Therefore lets have a defining moment:

Money: Easily exchangeable, is relatively scarce, and is a store of value.

Inflation: An increase in the money supply
Deflation: A decrease in the money supply
Hyperinflation: A self-perpetuating unstoppable (more or less) state of inflation
Recession: A significant decline in business activity, mainly a contraction in the economy or slowing of growth
Depression: A long-term economic state characterized by unemployment and low prices and low levels of trade and investment
Stagflation: A period of time characterized by high inflation and recessionary conditions.

I’ve been looking at calls for the vaious scenarios and needed some clarification as to what happens in the various situations. For the most part it seems obvious, but I’ve been struggling with the increase in the value of the United States dollar. Our national debt is above 10 trillion and rising rapidly as the recent bailouts continue, and the most recent increase in military spending added another $612 billion that we have to pay for.

Why is the risk of deflation so frightening that the Fed, Treasury, governments, and foreign central banks will do anything to stave it off? Deflation is like the grim reaper knocking on your door for a fiat currency. A fiat currency survives on debt and inflation (credit expansion). Too much inflation and it can become worthless, and negative inflation (deflation) and it gains value. That sounds like a good thing but it isn’t. As the currency gains in value debt becomes more expensive, and thus more difficult to pay off. Imagine taking out a $100,000.00 loan with todays dollars and paying it off with dollars from 1930. Good luck! During deflation prices also fall due to the decrease in the money supply and as there is no longer credit being handed out for people to use to consume and invest. The whole system comes tumbling down and the reaper walks in the door to say hello!

When credit is created (a loan) that is an increase in the money supply, and when it is paid off that is a decrease in the money supply. Say the loan is $100.00. That is $100.00 of money put into existance with a very small percentage actually backing it. Now I repay my $100.00 loan and that credit is erased and the money supply contracts. This is the normal situation that occurs daily. However, if people don’t want to lend or borrow then we have a problem.

No credit means no ability to borrow, which means no abilty to purchase goods and services. Everything is based on debt today. The change began in 1913 with the Fed, and the ultimate shift to fiat money was in 1972 during the Nixon presidency when we abandoned the gold standard and thus savers were punished from that day forward.

Okay this leads to me to the strengthening of the United States Dollar… Why I ask is it getting stronger. Many argue that it is because Europe is weakening, which may be part of the picture. However, I read something that made a clear point that because European banks are required to hold dollars for various toxic debt they hold denominated in dollars they normally use the interbank markets based on the LIBOR rate. However, that market is seized up and nobody wants to lend so they start using the EUR / USD credit swap market. As they purchase dollars its value goes up. Notice today that the Euro gained against the dollar when the Fed decided to start purchasing short-term commercial paper. They are stepping in and becoming the new mainstay for that market: which one? EVERY MARKET <Interesting…>

And tomorrow is a new day!

Fed inflating with no restraint – Hyperinflation?

Posted on September 25, 2008 by TheGauntlett

A picture is worth a trillion words…

Money Supply 09/25/2008

Frankly I’m not surprise to see what the Fed is doing and can only imagine what this is going to look like if this bailout goes through. There is a precedent throughout time that inflating the monetary supply only prolongs the inevitable. This is a sad state of affairs and I see only troubled times ahead for the once mighty dollar. Like the Romans who clipped their gold and silver coins the United States is creating more and more money from nothing. Why do we need a bailout package when we can just print money? It isn’t actually printed anymore, but issued through treasuries between the Fed, the Treasury, and private banks.

We are headed towards a recession if we aren’t already in one. Inflating the money supply while in a recession presumably means higher prices. The contraction in prices we recently saw was perhaps a byproduct of the Fed contracting the money supply, which it has now reversed course. During the Great Depression of 1929 many banks tried using their depositor’s money to help keep the market afloat just as the Fed is now doing… The outcome? You know what happened…

Now we are taking the opposite position and inflating. What happened to Rome… and thanks to Mike Hewitt at dollardaze.org he lists many countries plagued by hyperinflation.

Angola (1991-1999)
Argentina (1975-1991)
Austria (1921-1922)
Belarus (1994-2002)
Bolivia (1984-1986)
Brazil (1986-1994)
Bosnia-Herzegovina (1993)
Bulgaria (1991-1997)
Chile (1971-1973)
China (1939-1950)
Free City of Danzig (1923)
Ecuador (2000)
England
Greece (1944-1953)
France (1789-1797)
Georgia (1995)
Germany (1923-1924, 1945-1948)
Greece (1944-1953)
Hungary (1922-1924, 1944-1946)
Israel (1979-1985)
Japan (1944-1948)
Krajina (1993)
Madagascar (2004)
Mexico (2004)
Nicaragua (1987-1990)
Persian Empire (1294)
Peru (1984-1990)
Poland (1922-1924, 1990-1993)
Romania (2000-2005)
Ancient Rome
Russia (1921-1922, 1992-1994)
Taiwan (late-1940′s)
Turkey (1990′s)
Ukraine (1993-1995)
United States (1812-1814, 1861-1865)
Yap (late 1800′s)
Yugoslavia (1989-1994)
Zaire (1989-1996)
Zimbabwe (1999 – present)

The fiat money system that we presently have, which in its present form has only been in existence since 1971 when we went off the gold standard. To say that we have a precedent for what may or may not happen is incorrect. We are now in uncharted territory, however history has its lessons.

Trevor Gauntlett

Tag Archives: gold