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Doug Carey
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Doug Carey is the owner and founder of WealthTrace. He has over 17 years of experience in the financial markets. He is a Chartered Financial Analyst with a masters degree in Economics from Miami University in Oxford, Ohio and a B.S. degree in Economics, with an emphasis in Finance, from Ball... More
My company:
WealthTrace: Retirement Planning Software
My blog:
A World of Planning
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  • A Rebuttal to Those Who Think Everything is Just Fine
    It has apparently become en vogue lately to start playing devil’s advocate and announce that everything is just fine in our country. Some are claiming that consumers have deleveraged enough and that the banks are now healthy enough to start lending again. Others say that the Fed’s massive experiment with so-called Quantitative Easing, i.e. printing money, has worked and they point to the rising stock market as proof. I respectfully disagree with all three assertions.
    First, total consumer debt has decreased about 10% since it peaked in 2007. This is a decent start, but far from the massive deleveraging that is needed in order for consumer balance sheets to be anywhere near the norm of the last 100 years. Secondly, it appears that too many people have very short memories when it comes to banks and their holdings. Have people forgotten how many losses the banks were allowed to hide starting in 2009? It became legal for banks to stop marking to market. They have hundreds of billions of dollars in losses that are not being accounted for. Banks may begin to lend again, but the room for error is so slim that it would only take a small downturn this time to push many banks into insolvency. As for the idea that a rising stock market proves QE is working, that is like saying that a car that moves forward after being filled up at the gas station proves that gasoline has fixed the problem with the cracked axle, the oil leak, and the bad transmission. It is simply spurious correlation. Printing by the Fed only increases the amount of money going into the stock market in the short-run. This has always been the case and it means nothing for the long-run health of the economy. If printing money could create genuine wealth then we should let the Fed stomp on the printing press accelerator as much as possible. We should also be giving this advice to third world countries in Africa and Asia. Just print money, it works here right?
    We should never forget that printing money comes at considerable cost. The following chart should be shown to every citizen in this country every day until they fully understand what it means.

    Look at the value of the dollar before the Federal Reserve came into existence in 1913. You could actually stuff your money under a mattress and the value of it would grow over time. This is of course the natural state of things. As economies progress and become more productive, the value of the currency should rise. Except for wartime, this is exactly what happened in the U.S. But in 1913 the dollar began its decline, interrupted only by the Great Depression. The Federal Reserve’s money creation has led to $1 in 1913 being worth 5 cents today.
    Another statistic that should be shown to everybody until they understand it is this:
    — Finance Industry’s Share of Corporate Profits in 1948- 8%
    — Finance Industry’s Share of Corporate Profits in 2010- 42%
     
    Think about how impossible this should be. How can an industry that produces no tangible product account for 42% of our country’s overall profits? In a country as diversified as the U.S. once was, this simply should not happen. But with the Federal Reserve combined with fractional reserve lending and FDIC guarantees, the banking sector has been allowed to grow almost uncontrollably, especially over the last 15 years.
    So to my fellow contributors who think all is fine here in the U.S., I say look again. There are serious problems in this country and they begin with the structure of our financial system, led of course by the Federal Reserve. Until the power of the Federal Reserve is reined in, we will have serial bubbles, constant uncertainty, and a banking/finance industry that reaps gargantuan profits on the backs of those who lose savings due to the falling value of the dollar.
    It is difficult to shield oneself from what is happening to our currency and economy. But there is of course one safe haven, and that is gold. Gold will have its up and downs, but it is truly the ultimate hedge against financial meltdown and our constantly debased currency. To those who will listen I say be ever vigilant against the Fed and their power to destroy the value of your savings. Do not become complacent as many investors did after the supposed recovery following the tech bubble crash. Things are not fine out there and the Fed has not saved us. In fact, the Fed has only made things worse and has delayed the great deleveraging that needs to take place. Prepare by holding gold and investing in companies who make things we need, such as food, energy, and usable water. I’m all for optimism, but listening to those who don’t understand the true roots of our problems will only make investors complacent at a time when they need to be on high alert.
     


    Disclosure: I am long GLD, SGOL.
    Jan 24 11:21 AM | Link | 1 Comment
  • City of Vallejo, CA to Pay 5 to 20 Cents on the Dollar
    The news for unsecured creditors of Vallejo, California's municipal bonds is in, and it is not good. They will only receive 5 to 20 cents on the dollar under a reorganization plan the city filed Tuesday in federal court.

    The city regrets that it cannot pay a higher percentage,” Vallejo officials said in the court filings. “The city lacks the revenues to do so while maintaining an adequate level of municipal services, such as the provision of fire and police protection and the repairing of the city’s streets.

    For the full article please see- http://www.bondbuyer.com/news/vallejo_california_unsecured_creditors_bankruptcy-1022294-1.html?ET=bondbuyer:e2782:2060276a:&st=email&utm_source=editorial&utm_medium=email&utm_campaign=BB_intraday_011911

    It has been a long time since investors were overly concerned with losing their principal on municipal bonds. The last time there were a substantial number of municipal defaults was during the Great Depression. By 1935, 15.4% of municipal debt was in default. During our most recent downturn we have not seen those levels of default, but there are serious potential cash flow problems for states and cities alike. Vallejo is certainly going to be one of the worst cases, but investors should be prepared for a very tumultuous 2011. Muni yields in general are not yet nearly high enough to compensate for the risk.

     



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jan 19 9:28 PM | Link | Comment!
  • More Germans Want to Abandon the Euro
    Pressure is building on German Chancellor Angela Merkel as more and more German citizens are beginning to realize that they are bearing the brunt of the bailouts in Europe. Nearly half of all Germans want to go back to the deutschmark as the German newspaper Deutsche Welle reports:
    It's been a tough year for the euro, with debt crises in some eurozone countries chipping away at the common European currency's value. Many fiscally disciplined Germans were frustrated to see their taxes going to bail out Greece and Ireland, whose governments' debts had threatened to bring the euro down.
    For that reason, it seems that many Germans look fondly back to the days of the deutschmark, once one of the world's most stable currencies. German daily Bild commissioned a survey by Cologne's YouGov-Institute that found that 49 percent of Germans want the deutschmark back. Only 41 percent of those surveyed don't.
    The survey also found that the majority of Germans are worried about the stability of the euro and the possibility of inflation. Some 77 percent of the 1,068 people questioned by YouGov said they personally had not profited from the adoption of the euro.
    Would they adopt the euro today?
    If the country were currently not part of the eurozone, only 30 percent of those asked would today vote to adopt the euro and 60 percent would vote against such a move.
     
    For the rest of the story see http://www.dw-world.de/dw/article/0,,14737918,00.html. None of this is surprising. It was only a matter of time before the German people said enough is enough. As I pointed out in a recent article, http://seekingalpha.com/article/244339-avoid-eurozone-investing-until-the-defaults-begin, there will be defaults in Europe and the beginning could be simply that Germany decides to end the bailouts.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jan 06 10:10 AM | Link | Comment!
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