Dr. O

Cramer Grilled on Jon Stewart

Fair enough.

There were some rational people during the bubble years who foresaw quite clearly what was to come and what was transpiring. I used to subscribed to Bill Fleckenstein's "Daily Rap" a couple years ago and he had contacts like "The Lord of the Dark Matter" who described the deterioration in the SIVs and CDOs and whatnot back in 2006.

Unfortunately Bill was given about 1 minute every other week to chime in on CNBC. In all fairness, short sellers don't want much attention, so it's not like Bill is likely clambering to be on TV.

But I like Stewart's characterization of CNBC as an infomercial for the financial services industry. Bingo!

As for me, Cramer is Cramer. As an rookie investor, I've learned a lot about individual companies and stocks and sectors from him. I just ignore his buy and sell recommendations and his market calls.

I use my own common sense.

How Does $9000 Gold Sound?

Wasn't that the problem in the 1930s? Not enough gold to back the various currencies, which prohibited expanding the monetary base, which intensified the Great Depression?

Anyway, as the author points out, there's not nearly enough gold around at current prices to back up the trillions is paper currency in circulation. However, what if other precious metals such as silver were brought back? Palladium? Even copper? Some tangible store of wealth other than paper.

How about oil? or natural gas? or gasoline? From gold certificates, to silver certificates, to oil certificates? Or natural gas certificates? or gasoline certificates?

Friday Outlook: Rage Against the Machine

Things I, as a life-long Midwesterner with only an average knowledge of economics and financial markets, am totally freaked out about, in no particular order (bearing in mind that I listen to a lot of conservative talk radio):

1. Obama and the Congress are crystal clear about what they want to do as fast as possible:

a. Pass an 800 billion dollar stimulus bill that no one read that has been of little to no benefit to the economy, but was mostly a hodge-podge of pet spending projects, and pay back to political allies.
b. Under the delusion of global warming, pass a carbon tax that would hurt already impoverished Americans with higher energy costs, and really hurt the oil refiners, coal companies, and energy producers. Ironically, cap and trade would increase our reliance on foreign energy by making it cheaper to import energy than produce it at home.
c. No interest in here and now clean energy solutions such as natural gas and nuclear energy.
d. Nationalize the health care system in such a way that costs to the government will continue to skyrocket (according to the CBO), choice will decline, and quality will surely decline.

2. Higher taxes on just about everyone and everything in order to grow the government at the expense of the private sector.

3. Although Democrats are by nature populists, the polices noted above are guaranteed job killers, and there is no end in sight to the increase in unemployment. As it stands many states have 10% plus unemployment, and people without jobs don't pay taxes, don't buy things, and don't pay their bills (credit card, mortgage, etc.).

4. Skyrocketing yearly budget deficits to the tune of Trillions of dollars, as well as skyrocketing cumulative national deficit. The trick here is that you can keep interest rates low by having the Federal Reserve buy the debt that the Treasury issues. The problem is that this is a ponzi scheme, and it destroys the value of the currency.

Japan has gone down this road already and one may note that property values declined for about 20 straight years, their stock market lost 75% of its value over a 20 year period, and the Yen was purposely devalued to stimulate exports. In short, Japan has been in a steady decline for the past 20 years.

5. Obama and the Congress really have no idea how destructive their policies will be to the economy, or, as some have said, they do understand, and want the economy to collapse in order to consolidate their power over the people and implement their political agenda, which seems something like fascism.

6. Crime will increase as people lose their jobs and become desperate for basic goods and services.

7. Cities and suburbs will be studded with empty stores and crawling with unemployed men wandering the streets. Think New York in the 1970s. Remember what Time Square used to look like?

8. The American Experiment will be over for a while, as the consumers outnumber the producers, and for most the juice isn't worth the squeeze, that is, working hard no longer pays. Like France.

9. The US Dollar will collapse, meaning that anyone smart enough to hold onto their money will see its buying power evaporate. Holding other currencies, precious metals, and commodities should help for the financially literate.

10. All this stuff about stock market manipulation is more or less true, meaning that the millions of Americans who counted on stable or rising equity prices to fund their retirements through their IRAs or 401Ks will be no better off than an investor with Bernie Madoff.

These are things I worry about these days.

Wednesday Outlook: Big Brother's House

I might be early, but I completely changed my trading/investment posture yesterday. Todd Harrison at Minyanville, among others, has been calling for a double-dip recession, with the equity markets doing a double dip, or "W" this year. I have enormous respect for Todd, and credit him for keeping me out of the equity markets prior to the collapse last year.

Anyway, I'd been trading the trend since April, until yesterday. I was long and wrong going into the session: long SSO, TBT, SLV, FXI, EWZ, EWH, EWT, FXA, and FXE--playing the weak dollar. strong equity, strong commodity trinity. Things were promising overnight Monday, as the Asian markets were up, and the US Dollar was down, particularly against the Aussie.

However, this trade is getting long in the tooth, and, failed yesterday, after a few feeble earnings reports, and a weak consumer confidence data point. The dollar rebounded a bit, commodities tanked, and stocks sank.

Given the huge multi-month run in the equity markets world-wide, the lack of anything other than mediocre or just plain bad news from the economy, I feel its time to be defensive, and, truth be told, the risk-reward favors the short side in some instances. The 10% run up in the DJIA in the past two weeks could be viewed as a blow off, or climax top to this rally.

Short term, equity declines (and China was down 5% last night) have been correlated with a rise in the dollar, a rise in Treasury prices and a fall in commodity prices.

Accordingly, I have sold everything for now. I'm not seeing a catalyst that would drive a rapid deep stock market decline, but if one emerges we are primed for said decline.

I would use the possible decline in Brazil, China, etc, as a buying opportunity, eventually, and the rise in the dollar and rise in Treasurys as a shorting opportunity. Like others, I see our economic problems and the political solutions to them (spend lots of money) ending with a yet weaker currency, higher interest rates, and inflation. But that's down the road just a while longer.

Currently, unemployment is rising, debts are going bad at a rapid rate, and a temporary state of excess supply/over capacity is keeping a lid on prices. So cash is king (although the correct currency is another question).

Tuesday Outlook: Commodities, Global Markets

Wake me when this depression-like recession is really over. Wake me when the destruction of asset value in equities, commodities, and real estate is really over. Until then, I'm in cash or equivalents except for a trade. Only thing I wonder about is what currency(s) to hold.

Why Are Banks Holding So Many Excess Reserves?

1) Hoard money, pay 0.25% on deposits, and buy Treasurys yielding 4%. Ka-Ching.

2) You know the crap on or off your balance sheets, that's bound to go bad, so you better hold reserves against it.

Tuesday Outlook: Commodities, Global Markets

The relevant excerpt from Ben Bernanke's Op-Ed in today's Wall Street Journal is below. In essence, easy money to continue. Hence, prices for most things including stocks, go up.

>>The depth and breadth of the global recession has required a highly accommodative monetary policy. Since the onset of the financial crisis nearly two years ago, the Federal Reserve has reduced the interest-rate target for overnight lending between banks (the federal-funds rate) nearly to zero. We have also greatly expanded the size of the Fed’s balance sheet through purchases of longer-term securities and through targeted lending programs aimed at restarting the flow of credit.

These actions have softened the economic impact of the financial crisis. They have also improved the functioning of key credit markets, including the markets for interbank lending, commercial paper, consumer and small-business credit, and residential mortgages.

My colleagues and I believe that accommodative policies will likely be warranted for an extended period.<<

Also, there's been some chatter out of the administration very recently, including Obama and Summers, about the need to re-build our manufacturing base, something I agree with. The US ranks very low in terms of exports as a percentage of GDP. And manufacturing jobs are exactly what the US needs to rebuild wealth.

However, a focus on exports by the administration is being interpreted as "code" for a weaker US Dollar policy. Rightly so, I think. We can't export if our major trading partners' currencies are artificially low--China officially "sets" its currency low, Japan has had an official weak Yen policy for many years, even the Swiss National Bank has officially endorsed a weak Franc policy--the US Dollar has held up almost by default.

But I suspect that most involved both inside and outside the US have agreed that a weaker Dollar will promote US export growth, US economic stabilization, and, inflation in commodities; this is good news for fragile emerging and developing market economies, to which the European banks are perilously tied.

Bottom line: Dave is right, as the US Dollar takes another leg lower, stock and commodity prices will rise. Inflation over deflation.

The Twenty Year Stock Bubble Is Still Inflated

What about wise women?

Hard to say, what with 0% interest rates, and high commodity prices. It's like we're in the midst of recession-depression for most people, but speculators have high access to free money. Credit for most people is tough to get, and small businesses are crumbling.

Ultimately, I think stocks will go back down before economic activity picks up enough to support asset prices.

Personally, I'm about hard assets.

Long GLD, TWM, SDS.

More on White House's Strong-Arming of Chrysler Hedge Fund Hold Outs

I'm wondering if there isn't anything the White House, the Fed, and the Treasury, won't do, to achieve their objectives. Preserving the financial system, definitely worth doing. No collapse and domino bankruptcies.

Printing up some extra cash to attempt to stave off deflation and prop up the banking system and the economy, ok, we've been doing that since Volker left the Fed. But this is ridiculous.

Stock holders are being diluted; bond holders are getting the shaft; and those dollars in our pockets are being diluted. Faith in the value of financial assets like stocks and bonds has been wounded, not by trades gone awry, but by Government directly intervening in the capital markets and in corporate governance.

You now have the President of the US firing CEOs, determining the outcomes of bankruptcies, and the Treasury won't allow banks to pay back TARP funds, to keep these banks under the direct control of the Government.

You can't seriously invest in the financial instruments of any company that is or could be in the cross hairs of the Federal Government. Maybe that's why tech has caught such a nice bid lately; and why energy and health care stocks have been such laggards (they're next).

Tuesday Outlook: Commodities, Global Markets

Dave, your comments, which I agree with, reminded me of this (I'm not sure why, maybe the whole denial aspect of recent market resilience).

From The Washington Times, July 9th, 2008:

--In an interview with the Washington Times, Phil Gramm, a former Texas senator who is now vice chairman of UBS, the giant Swiss bank, said he expects Mr. McCain to inherit a sluggish economy if he wins the presidency, weighed down above all by the conviction of many Americans that economic conditions are the worst in two or three decades and that America is in decline.

"You've heard of mental depression; this is a mental recession," he said, noting that growth has held up at about 1 percent despite all the publicity over losing jobs to India, China, illegal immigration, housing and credit problems and record oil prices. "We may have a recession; we haven't had one yet."

"We have sort of become a nation of whiners," he said. "You just hear this constant whining, complaining about a loss of competitiveness, America in decline" despite a major export boom that is the primary reason that growth continues in the economy, he said.

"We've never been more dominant; we've never had more natural advantages than we have today," he said. "We have benefited greatly" from the globalization of the economy in the last 30 years.--

The S&P 500 was at 1244 the day Phil Gramm characterized the US as being in a "mental recession." The unemployment rate (such as it is reported) was 5.8%.

Dave, those nasty things still on the balance sheets of banks are just "mental toxic assets" lol.

Thursday Outlook: Commodities, Global Markets

Off topic: global warming. Michigan just celebrated the anniversary of its most intense heat wave ever! 9 consecutive 100 degree days. Oddly, this occurred in 1936. Last winter was one of the coldest and snowiest on record. This summer, we've yet to hit 90 degrees, and have been running 5-10 degrees below normal per day. Cap and trade? OMG what lunacy during a depression! What do rational people think of global warming? The Chinese gave it the one-finger salute at the G8.

Tuesday Outlook: Commodities, Global Markets

Does anyone else share the impression that the charts look a lot better than the companies, the economies, and the world of finance they are supposed to reflect?

Thursday Outlook: Commodities, Global Markets

Thanks Dave. It struck me that since the March lows, out of the next 20 weeks, 16 have been up and only 4 down.

I woke up in a cold sweat last night. I had a nightmare that the US Dollar was near all-time lows, interest rates were at 0%, and the budget deficit was almost 2 trillion dollars.

In my nightmare the Federal Reserve was only interested in avoiding a depression, and had resigned itself to a weakening US Dollar. The Federal Reserve didn't care about bubbles blowing up in stocks or commodities, because they told themselves they could raise interest rates quickly if necessary once a recovery were underway.

What a crazy dream. Scary.

Why the Dow Is Headed to 6000

I'd say we're in a Japanese-like bubble burst except our individual and governmental balance sheets are insolvent. The only logical way for this thing to end, over the longer term, is continued devaluation of the US Dollar, and continued loss of reserve currency status.

Stock picking should still work, but look for continuing growth abroad. There's so much manipulation of currencies/commodities... bonds that for now, things are quiet and meta-stable. I'm waiting to see which way things break in a meaningful way.

Either, the dollar goes down, stocks and commodities go up, or, vice versa. Following the oversold bounce in March we've been flopping and chopping for the better part of two months, in general, although individual stocks or commodities like AAPL or USO have continued to perform.

The logical way to restart the global economic engine is to resume over-consumption in the West. But the previous cycle's over consumption was fueled largely by credit growth, not job or wage growth. So it's unclear to me where the jobs are going to come from that will produce the income that will drive consumption.

One recent study showed barely a million new private sector jobs created in the past decade in the US. The rest are government jobs, a trend that has accelerated. Sadly, all the frothy high paying jobs fueled by excessive credit in the financial services industry and real estate are being wiped out.

And America continues to export what is the heart of any vibrant economy, manufacturing jobs. Ross Perot had it right in 1991 when he said that as our manufacturing jobs were outsourced to the developing world, we would become a progressively more impoverished nation.

In a Thomas Friedman "flat world" a US high school grad can't expect a manufacturing job making 20-40 dollars an hour with benefits when his employer is competing with companies paying one tenth those wages and benefits in China or Mexico. I see these unemployed folks everyday. They literally have nothing to do with themselves. No jobs. They tend to watch TV and smoke pot.

Things are somewhat more stable in Europe and Japan, but they face similar competitive disadvantages and have been mired in low growth no growth economics for longer than us.

Growth in the developing economies is clearly fueling consumption of raw materials but its not clear that many jobs are being created in the West to manufacture goods consumed in India, China, etc.

With job losses, stagnant wages, wealth loss in equities and real estate, and very little interest income due to low interest rates, money is in short supply, and with excess capacity still being worked off, deflation is not off the table, in which case, cash is king, as it appreciates relative to goods and services.

However, if the US Dollar falls off a cliff, prices will be rising at a time when money is tight, leading to a full blown economic crisis and a rapidly declining quality of life. That would be too destabilizing an event for the world to tolerate at this time, and the powers that be will not likely allow that to occur.

The powers that be crave stability above all else, although at times cumulative imbalances need to wash through the system. The short term for the US would appear to be a slowing rate of decline of various economic indicators, followed by stabilization at lower levels of employment, wages, housing prices, etc.

We bounce back somewhat when psychology improves, credit is more free flowing, balance sheets are healed, and some risk taking ensues. For that to happen in a meaningful way, however, taxes have to be low enough to justify the risk, and regulations not too burdensome. And with the current political climate, this could be a problem.

Some have suggested that the various pieces of legislation being passed by the Congress (stimulus-debt, cap and trade taxation, health care taxation, etc) will so hobble the private sector that by the time an ordinary economic recovery would have occurred, it will not manifest. Some speculate that FDRs new deal had this effect in the 1930s. And then there is Japan post 1989.

The key to prosperity in these leaner times may be to become more conservative in our expectations, more conservative in our investments and expenditures, and be alert for diamonds in the rough: companies with continuing growth, supply-demand imbalances in certain commodities, little bull markets.

Wednesday Outlook: Commodities, Global Markets

I agree Dave. The US Dollar is the sacrificial lamb in the "rescue" of the financial system and the economy.