Avery Goodman

Option Trader Friday Outlook: Is the Dollar Going UUP?

I agree that the dollar is about to rally, and commodities, including gold (to some degree), are going to take a temporary beating. However, I disagree with your reasons why, and your idea that money disappears from the system simply because debtors default. The fundamentals are far more complex than that.

A $700 billion stimulus, especially when combined with TARP, TALF, and various Fed credit provisions is certainly NOT "piddly". Federal Reserve printing programs represent a real and important threat to the long term stability of the financial system.

I believe and hope that the Fed is about to drain some of the funny-money. However, if they don't, and, instead, add more funny-money, they will be putting our Republic in jeopardy. They will cause a spiral of negative opinion toward the dollar that will prove extraordinarily expensive or impossible to control, in spite of the current demand for dollars overseas. In that scenario, we will face the toxic fallout of hyperinflation, of the same type that created Hitler, after the Wiemar period.

Silver Prices Are About to Fall

Silver is likely to go up in price over the very long term. I have very clearly stated, many times, in this article and others, that silver is an excellent very long term investment. It is better to buy it when it is cheaper, however, rather than when it is more expensive.

As a long term silver investor, you will need to grit your teeth as it gets periodically clobbered. The reason for the volatility is a topic for a book, or, at minimum, an article, because historically silver and gold are the most stable commodities. Not anymore. Without a long explanation of why, we can simply say that lack of effective regulation of the futures markets casino clearly has something to do with it.

Decent men do what they can to make the world a fairer place. But, practical men will also deal with the world as it is. Practical men will not engage in swordfights against windmills. It is not always pleasant to deal with reality.

One reality that an author on seekingalpha must deal with is the requirement of disclosing long or short positioning, I DO NOT endorse the idea of people taking short positions in silver. Generally, that should be left to people who have the knowledge to do it without putting themselves at risk. One can be both hedge existing silver investments, or become overtly short silver in many ways, including buying puts.

The essence of this article is simply an explanation of why I reversed my opinion, temporarily, on a bullish speculative trade suggested in an article I wrote in early March. Nothing more.

Silver Prices Are About to Fall

This piece was intended as presenting some thoughts on a speculative trade. It was never intended as a primer on investing strategy. A very limited part of anyone's portfolio, in relation to overall wealth, can be devoted to speculative trades. The risk of being wiped out is too high to devote a large part of your portfolio to this type of activity. Remember, your family must eat, regardless of whether you win or lose in the market.

A long term "core" position is very different. Long term, you may choose to hold stocks, bonds, metals, and so on. You've determined that the long term positions are worth sticking to for a very long time, regardless of whether they move up and down a bit, while you are holding them. Income can be generated from long term holdings in the form of dividends, and/or by selling covered calls at appropriate times.

In contrast, speculative trades are short-term ones that have a reasonable likelihood of resulting in a spectacular gain. You take a big chance, and are willing to lose the value of the entire investment in exchange for the prospect of a big gain. You should not bet any more money than you can afford to lose on speculative trades.

Acting on the opinion that silver was going to soar, back in March, and, now, acting on the opinion that silver is about to go down substantially, are both examples of speculative trades.

3 Oligarchs Dominate the Housing Market, Backstopped by You

Excellent points, and well made with a sense of humor. If we look carefully at the foolishness of the folks in Washington DC and New York, if don't laugh as they destroy our beloved country, we would have to cry.

Can a Market Crash Save Us from Hyperinflation?

Hopefully, by next year, having learned that this type of so-called "stimulus" costs much more than it is worth, the government may back off from the insanity and allow the economy to recover more naturally. Obviously, the mistakes that have been made are severe. However, with the much lower current account deficits that are prevailing, even now, a fundamentally great nation, like the USA, could still have hope of true economic recovery if only the foolishness stopped here. But, in all likelihood, you are right that it won't. The NY Fed may to supply endless "liquidity" to juice the markets.

On Jun 30 03:52 AM Egg wrote:

> Ok, what about next year's bonds? And the next year's after that?
> And so on and so on?

The Truth About Unemployment Numbers

Mark,

If Fox Business News is covering news in the honest forthright fashion that is going out of style, that is good news.

ABG
On Jun 22 08:33 AM Mark Lieberman twitter/foxeconomics wrote:

> You should be following emlployment / unemployment reports on Fox
> Business Network. We regularly not the widening gap between those
> collecting benefits (including extended benefits) and those reported
> as unemployed by BLS. That gap is now over 5 million.
> The other concern is the impact on businesses who contribute to unemployment
> insurance funds. Those contributions are based on experience factors
> (the number of former employees collecting benfits) and could mean
> employers will be making higher contributions long after a labor
> recovery -- on a greater number of employees.

Break Up the Big Banks

Clearly, you did not read this article, as I do not support Henry Paulson's policies.

I would have allowed banks to fail, put them into receivership, removed managements entirely (without severance pay or golden parachutes), sold them off piece by piece to more responsible people, and held my breath as I printed as limited an amount of money that was needed to pay off depositors (if necessary) and/or transfer deposits to a new institution. I certainly would not have supplied government subsidized funding, in the form of FDIC guarantees for bank bonds, to back up high risk investment banking activity.

My policies would have put the nation into severe recession. However, we will now enter a much more severe depression (inflationary depression), over a far longer period of time, because of Paulson/Bernanke policies. I fear that the coming problems may put the very existence of the United States of America at risk.

The amount of money that will now be printed will be many times greater than it would have been had insolvent banks been liquidated. The U.S. government is now forced to print money based upon the gross values of leveraged bets, rather than close to the monetary base by replacing deposits.

It is now impossible to liquidate insolvent banks. The U.S. government has erroneously made legally binding investments that will bankrupt us if we liquidate the banks, at this point. These investments ARE NOT limited to, or mostly, in the form of TARP allocations. The situation is far worse than it would have been if correct measures had been taken from the beginning.

We must make sure that this cannot happen again. That is why systemically important banks must be broken up into more manageable sized units that pose little risk to the nation and the world.


On May 21 06:50 PM another pissed off banker wrote:

From another pissed off banker,
If I didn't know better I'd think you were related to Paulson. You
iddiots wanted us to take money to buy failing institutions with
certain requirements placed by you on the front end only to start
changing the terms after we accepted it.

Break Up the Big Banks

The problem is that government, and its taxpayers, are being forced to step in and bail out these banks. That being so, it follows that government also has the right to initiate a "preemptive strike" to prevent being forced to bail them out.

While it would be better if no one ever got bailouts, I think that, politically, voices that oppose bailing out irresponsible large institutions will always be squelched, as they have been over the last year.

Accordingly, there is no choice but to approach this problem from an anti-trust viewpoint, and break up any bank that poses a systemic risk, before the risk manifests itself.

Break Up the Big Banks

Oligopolies do not fail even though they may suck the life blood out of the society in which they reside. They prevent free markets from existing, and, hence, the "free market" cannot eliminate them. Look at any banana republic and you will see oligopolic conditions that have been in place for hundreds of years. The oligarchs, in those countries are still in control, and the countries, themselves, are basket case economies because of that. The USA will join them if we do not correct this situation very soon.

With respect to the "banking" industry, I am not referring to the type of community bank that makes loans and accepts deposits in their local community, nor to the branches of big banks that may do the same thing. Although it would be better for people to follow the Home Depot management's example, and become self-funding, such banks are the salt of the earth, and critical for the communities they are in.

When we break up big banks, the first thing we will do is free those divisions from liability to the irresponsible risk-taking of the other, more malevolent, parts of the bank. You are absolutely correct that some banks are still profitable. Perhaps, I did not make it clear, but I am discussing breaking up banks which pose a "systemic risk", not community banks, and not banks that simply operate on a national basis.

The banks, or parts of banks, that you are referring to do not pose a systemic risk. The "bad boys" I speak about are the ones who habitually work closely together and with the Federal Reserve, and engaged in securitization, payments to ratings services to give AAA ratings to toxic waste debt instruments, and the ones who continue to engage in what most prudent people would see as reckless high risk derivatives sales and guarantees. These big banks pose a risk to the entire system, and that is why many people felt it was necessary to bail them out, although some disagree about that necessity.

Anti-trust action is a traditional, well worn, and effective means of dealing with this problem. We need active enforcement and, perhaps, Congressional reinforcement of those laws to help them work.

Thank you for your comments.


On May 21 10:35 AM greedcanbgood wrote:

Your first premise here is that the banking industry is controlled
by a handful of banks and by extension competition is limited. I
challenge you to demonstrate where this is the case. Go to nearly
any town in the US and right by your BofA, Wells, Citi, Chage, USB
(pick your big bank here) is a small community bank who offers products/services and rates that are at least as competitive. Most of them are making money and doing well. Where’s the “oligarchic consortium”?

Why Our Credit Crunch Mirrors the Weimar Hyperinflation from 1919-1923

Some of you have expressed a preference for "housing" over gold, as your theoretical means of escaping from the stealth tax of heavy inflation. Let me quote from the famous former Fed Chairman, Alan Greenspan who, before being seduced by the "dark side" wrote, in 1966, in a paper, titled "Gold and Economic Freedom":

"...Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights..."

Why Our Credit Crunch Mirrors the Weimar Hyperinflation from 1919-1923

On the other hand, a terrorist attack might actually have the opposite effect of prolonging the avoidance of hyperinflation. This is why I have pointed out, in the article, that no two historical events are ever alike. But, there remains a frightening parallel between the credit/debt situation of Wiemar Germany vs. the USA, as well as the behavior of the Reichsbank in 1918 and early 1919, in reaction to the post-war "credit crisis" and the behavior of the Federal Reserve, now, in response to this "credit crisis."

Why Our Credit Crunch Mirrors the Weimar Hyperinflation from 1919-1923

The Zimbabwean experience has few parallels to the process now happening in the USA, other than the unfunded fighting of a foreign war (which is not insignificant, however). It is presented only to show that neither the German reparations payments, nor the destructive war on Germany's territory, nor a change of government at the initiation of hyperinflation, are necessary prerequisites required for the initiation the phenomenon.

Because of the policies of the monetary oligarchy, all the elements needed for hyperinflation are already in place, with respect to the USA. By means of example, and not by limitation, all that is now needed is, perhaps, a new terrorist attack, or even just a series of failed treasury auctions to fill in the missing element of a "trigger" event. The same is even more true of the U.K., which is unlucky enough not to be issuing the world's reserve currency.

Why Our Credit Crunch Mirrors the Weimar Hyperinflation from 1919-1923

Some comments imply that in the absence of the devastation of WW I, and the payment of reparations, hyperinflation is not possible. This is a reflection of the basic humanity of the commentators, and must be understood as such. The first instinct we all have is to deny reality, and say, "No, no...that can't possibly happen. Maybe, it can happen to someone else...but NOT to me!" I went through this phase, during the first part of the time I began to consider the possibility.

It is human to deny, but it is not always logical or correct. We must often overcome such instincts in order to see the truth. One cannot flee from reality simply because it is very hard to accept. Neither the devastation of a war on a nation's own territory, nor forced reparations are a necessary prerequisite for hyperinflation.

Up until recently, Zimbabwee was the breadbasket of Africa, one of that continent's richest nations, a net exporter of grain and minerals, and one of the most successful African nations. It has not been involved in a devastating war. It did experience a change of government, in 1980, when blacks took over the government from the minority white government, but heavy inflation didn't start until years after that.

Inflation rates in Zimbabwee were high, in the 1980s, ranging from 7% to 20%, but, in the early part of that period, prior to the ascent of Paul Volcker to the Fed Chairmanship, inflation was high all over the world, including in America. Extraordinarily high inflation rates, in Zimbabwee, began in the 1990s. It did not begin as a result of any war, but, rather, as a result of economic mismanagement.

Zimbabwean inflation was made considerably worse, however, when the nation became involved in a war in Congo in 1998. That is when heavy inflation converted itself into hyperinflation. The war was never fought, however, on Zimbabwean territory. There was no bombing of cities or towns, no wrecked homes or industrial parks, no shell-shocked population. Zimbabwee simply intervened in a foreign war, pure and simple. All fighting took place in Congo. Just as George W Bush emptied America's coffers by invading Iraq, Robert Mugabe, the President of Zimbabwee, emptied his country's coffers supporting troops in Congo.

Since then, the situation has become uncontrollable. Just recently, it was taken out of circulation by the new government, and foreign currencies are now the circulating medium of exchange, with the U.S. dollar, and South African Rand dominant. In short, Zimbabwean hyperinflation was purely the result of economic mismanagement, including economic mismanagement of the budget for a war, and nothing else.

According to Wikipedia, "The first Zimbabwean dollar was introduced in 1980 and replaced the Rhodesian dollar at par...At the time of its introduction, the Zimbabwean dollar was worth more than the U.S. dollar, with ZWD 1 = USD 1.47...According to Central Statistical Office statistics, annual inflation rate rose to 231 million percent in July 2008." As most people already know, the Zimbabwean currency is now worth next to nothing.

One would hope that Americans, being more politically active, with a long history of an active republic, with traditions of independence and the rule of law, will eventually cry out so loudly that those in power will no longer be able to ignore them. The monetary oligarchy, otherwise known as the "Federal Reserve", and its constituent banks, will be forced to take notice. Before that happens, however, a devaluation in the range of the single or low double digits is certainly possible, and, dare I say...even likely.

As I said in the body of the article, my personal estimate for U.S. dollar devaluation does not reach into the millions or trillions. I believe that American devaluation will range somewhere between 1 to 4, or 1 to 10 by the end of the next 4 years. That, however, is still enough to essentially wipe out the savings of the middle class. The wild betters and risk takers will be subsidized, and those who were prudent will be punished.

That is why such inflation is immoral. That is why it will deeply scar our nation for a generation. It is time for people to begin to make their voices heard, so that the inevitable scarring can be kept as small as possible. Even in countries that do not own the world's exchange currency, the process of currency devaluation takes place over time. This time, the event will be far more protracted than in cases like Weimar Germany or modern Zimbabwee.

We are Americans, and fortunate enough to have the benefit of forefathers who were much wiser than we. The rest of the world willingly gave them the right to print the world's reserve currency. They did this because they believed in us, our integrity, our honesty, in our strength, in our courage and in our convictions. The monetary oligarchy, however, is in the process of either knowingly, or unknowingly, tearing all of that apart.

Fed Minutes: We Have Not Yet Even Begun to Print!

theman,

All the central banks are engaging in a race to the bottom. The issue is who can devalue paper money the fastest and furthest. They are all schooled in the same narrow minded Keynesian economic philosophy, so they all think alike. Only Germany stands out, because they have a direct connection to the 1919-23 hyperinflation. But, they will eventually be outvoted by the Club Med countries of Europe (Italy, Spain, Portugal, Greece, Cyprus, Malta) and soon as France swings into the currency debasing camp.

I think we will have something like a "worldwide Weimar". The currencies that are likely to collapse the most, and first, into heavy inflation and/or hyperinflation, are the U.S. dollar and/or British pound.

There is no telling what a particular currency will do over a space of a month or even 6 months to a year. Looking at trade flows, I'd say that China and Japan have huge problems. Both are also notorious historical currency debasers. So the yuan and yen are useless (and you can't buy yuan outside of China, anyway)

The Australians, New Zealanders, and Canadians may not do as much printing as a lot of other countries. Even that, however, is questionable, given recent statements by the Bank of Canada. I suspect that the low on the Aussie is in the mid-$1.50 to the US$ range (for the short term) and it is now near $1.40, so it is overbought, and probably will be cheaper in a few weeks to a month or two. Same with NZ$ and C$. When these currencies fall, as I believe they will, they will be the "place to be" for the longer term, at least with respect to that part of any portfolio that must be in cash.

Incidentally, over the next few weeks, I think the U.S. $ will rise, because of various things the Fed and Treasury are doing that I don't have time to fully discuss right now. But, over the long term, the dollar will deeply collapse, as predicted in this article.

Fed Minutes: We Have Not Yet Even Begun to Print!

Thank you, Joe Q. I navigated to the site you mentioned, and it is enlightening. I agree with Mr. William K. Black as to the potential culpability, the level of fraud and the need for prosecutions. I think there will eventually be indictments. Do not give up hope! The guilty will eventually be punished.

Justice is slow and frustrating, but it is sure, from my experience. The first order of business is cutting the tentacles of the international banking institutions that are squeezing the life blood out of Washington DC. We must do this by breaking up banks that have grown so large that they are a danger to the system. Second, we need to massively reform all regulatory institutions, including removal of exclusivity from organizations like CFTC, and empower state law enforcement to take the lead. Third, we need to punish the wrongdoers, in order to instill a sense of personal responsibility.

Shareholders should not be the ones paying the price for CEO misfeasance, but, in the past, that was almost universally the case. Executives who do evil, should be forced to pay a price for what they have wrought. We haven't even gotten to step 1 yet and that is disheartening I admit.