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John Dalt
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John Dalt is a retired small business owner who is now operates galtstock.com for stock investors and traders.
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  • Print More Money
    The market is up this morning acting like we might push through resistance this week.  We haven’t seen 1148 since 5/18.  Retail investors and traders are ignoring any bad news and jumping on the band wagon.  Smart money seems to be setting on the side, watching.  Shorts are taking it in the...shorts.
    Two weeks ago, the St. Louis Federal Reserve President James Bullard said the potential for growth in the U.S. economy is somewhat slower than two to three years ago.  His comments came after the U.S. recorded GDP growth of 2.4% in the second quarter, down from 3.7% in the first quarter.
    Bullard has been a voice for the Fed to start tightening money with higher interest rates to avoid inflation.  In an about face, he said the best course going forward may be for the Fed to revive the treasury purchase program to avoid deflation.
    Bullard referred to the danger of the U.S. falling into a deflationary trap like Japan did in the 90’s that led to the “lost decade” that continues to haunt that country.  Bullard noted that core CPI inflation is under 1% and after the second quarter GDP numbers said, “We need to think about what we’re going to do if we get further negative shocks.”
    Inflation protected securities (OTC:TIPS) are currently pricing inflation at 1.4%, they were over 2% earlier this year.  Bullard said, “If those continue to drift down and actual inflation continues to drift down, we could get into a sticky situation here (U.S.).”
    Bullard is concerned that the Fed’s language concerning low interest rates for “an extended period of time” may actually backfire and cause the economy to stall and experience low or negative growth.  This would lead the U.S. down the same road as Japan.  He believes the Fed could forestall this scenario by pushing more money into the financial system through quantitative easing.
    Bullard changing to voice his sentiment to restart quantitative easing is no small matter. The Fed has been rock solid on the strategy of keeping interest rates low, but ended the purchase of Treasuries in the first quarter, and mortgage backed securities (MBS) at the end of 2009.  Now it appears we are moving back to the “inflation trade.”
    We had gradually readjusted our thinking on the macro trends affecting the market.  Deflation or the chance thereof, had made us take a more defensive stand.  We were anticipating a sell-off of precious metals as traders were discouraged waiting on inflation to push the prices higher.  Deflation and slow growth meant a strong dollar, this was a danger to U.S. companies with overseas operations as the repatriation of profits would suffer from currency exchange rates.
    Now we have to reexamine every investment and reason we like it in light of what may happen at the next Federal Open Market Committee (FOMC) meeting. The Fed governors are meeting, and the statement on Tuesday could signal a significant change in the market operations of the Federal Reserve.
    The FOMC statement always moves the market, as traders parse the words concerning the Fed’s economic outlook and intentions going forward. We believe next week’s statement could be a ‘game changer’ when the Fed commits to "Print More Money."
    How Much More, Another $1.7 Trillion?
    Today’s Quote:
    The great enemy of the truth is very often not the lie - deliberate, contrived and dishonest - but the myth - persistent, persuasive and unrealistic.-John F. Kennedy, Yale Commencement address 1962
    Editors note:  We don’t believe “Inflation” is a lie or a myth.  We just don’t know the timing.  The truth may be a stagnate economy waiting for political backlash to the world improvers taxing, regulating and spending our country into a ditch.  The return to a free market would do more to lift our economy out of the doldrums than all the ‘planning’ in Washington.



    Disclosure: No Positions
    Aug 09 7:57 PM | Link | Comment!
  • Deflation, Knocking at the Door
    Deflation is defined as a decrease in the general price level of goods and services.  Paper currencies that are not backed by any store of value as a reference point (fiat money) can be inflated or deflated by monetary supply and economic decisions made by market participants.
    The bond market is pricing a deflationary period into our future.  Why else would anyone be willing to accept less than 3% return for 10-years?  The FOMC minutes released on July 14 expressed concerns about deflation and the fragile state of the U.S. economy.  The Fed has pumped money into banks, but the banks are reinvesting it back into Treasury bond funds rather than loaning it to businesses.
    Business is not expanding, but choosing to meet present demand with the infrastructure and workforce in place.  The uncertainty in the future creates an aversion to risk.  Why make an investment for capacity expansion if increased demand is not predictable?  It is better to work to increase productivity with assets in place if…if demand increases.
    Personal decisions are driven by observation.  Real estate has been in a decline since 2008.  Prices in some markets have fallen by more than 50% for certain once desirable properties.  Those who bought prior to 2008 would take a certain loss if they had to sell their home today.  Some who bought last year may have seen the value of their home decline below what they paid, though they thought the purchase price at time was ‘rock bottom.’
    Much has been written about inflation resulting from the increase in money supply from the Federal Reserve, but if the banks have no demand from business for expansion or consumers for consumption the money sits in the vaults (or buys treasuries).
    Real estate is just one example of a product that is available in larger quantities than the demand, so supply and demand is out of balance.  This is corrected by lower prices until the demand rises to consume the available supply.  It works in department stores with out of season sales of excess inventory, and it will eventually work in real estate.
    Another cause of deflation is if there is decreasing demand for the available product.  Sometimes our ‘Rat Brain’ takes over and we withdraw from activity because we don’t know how to interpret the present situation.  We can go back to the real estate example where we have an oversupply of homes for sale.  What happens if the number of buyers shrinks?  Even if the number of homes remained static, fewer buyers would mean lower prices because the demand would decrease.
    Finally, we understand our present danger of deflation is a relatively simple supply/demand imbalance.  We are used to thinking of supply/demand causing higher prices, but today we see the other side of the equation that is always present.
    1. Money is plentiful but has low utilization due to fear.
    2. Supply is plentiful for most items so there is no need for increased production.
    3. Business and consumers are reluctant to invest or spend, which reduces demand for available goods.
    There is one economic condition that can act as a rubber band in the move from deflation to inflation.  Governments are spending borrowed money in social safety net and stimulus programs.  This borrowed money is ‘first in line.’  As business and consumers gain confidence and expand capacity or increase spending the demand for money will increase.  This will act as a spring to push interest rates higher.  This is what happened in the ‘70’s as the demand for money increased and the private sector was crowded out by government borrowing.  Interest rates spiked into the high teens as the competition for available money increased.
    Our Trade of the Year could be in trouble if deflation fears pull buyers from the safety of precious metals.  Our long-term subscribers owned AGQ in June, but sold for a 10% gain.  We are waiting for a lower entry point.  We still like the investment, but traders will punish silver in a deflationary environment.



    Disclosure: No positions
    Jul 26 8:44 PM | Link | Comment!
  • Financial Regulation, Law
    President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Financial Regulation or Fin Reg) this morning.  It took us two hours to find a copy of the bill online in its final form.  You can access it from the Library of Congress.  From this link you can access a pdf file of the complete Act or access parts of the bill by clicking on the heading in the outline.
    At the signing ceremony this morning, the president said this law would prevent “breakdown in our financial system.”  Michael Steele, Republican Party chairman said the new rules will "saddle the business community with innumerable unintended consequences, tighter credit, and countless job-killing regulations."
    According to the Wall Street Journal the bill creates a new consumer protection department in the Federal Reserve, gives regulators the capability to liquidate financial firms outside of bankruptcy, and imposes new capital and leverage requirements on large banks.  The bill creates a new ‘council’ to identify systemic risks before they threaten the stability of the economy and provides for a non-binding shareholder vote on executive compensation.  The bill creates a new Office of National Insurance in the Treasury Department to monitor the insurance industry.
    The Atlantic Monthly has a good article from last week with an explanation of the different components of the bill.  We have not read the bill, at 2300 pages, it is not light reading!
    It would seem the new law, at 100 times longer than our constitution, creates more bureaucracy to choke business in the financial sector.  Were their excesses that led to the credit crisis?  Yes.  Much of the excess was at Fannie Mae (OTCQB:FNMA) and Freddie Mac (FRE), but they are not mentioned in the Financial Regulation bill.  They are exploding their balance sheets again with problem loans.  These two entities benefit from the implied backing of the U.S. Treasury, as they are government sponsored entities (NYSE:GSE).  They have already received $145 billion in TARP funds with expectations they will need more, much more.  Here is an interesting site that tracks total bailout moneys disbursed and paid back.
    These two entities were required to shrink their balance sheets in the original granting of TARP funds.  We wrote on 12/30/09, “The U.S. Treasury announced on Christmas Eve, while everyone was sipping eggnog that the backstop limits on Fannie Mae and Freddie Mac (twins) debt would be lifted for three years. As part of last year’s rescue of the ‘twins’, they were limited to $200 billion each and supposed to reduce their balance sheets by 10% every year. That requirement was modified by treasury, allowing them to increase their loan portfolio by an average of 7% in 2009 then start reducing by 10% in the following years.  According to the Associated Press, the 'twins' already account for 75% of all new mortgages written in the U.S.  The Treasury (administration) was able to sidestep congress by issuing this change before the end of 2009.
    The Fin Reg bill reminds your editor of a close up street magician, using sleight of hand to distract America’s attention.  While the GSEs are exploding their balance sheets trying to pump air back into the real estate bubble that collapsed in 2008, the government is enacting controls on the rest of the financial sector.  And we all cheer.  How big will the hangover be for Fannie Mae and Freddie Mac?



    Disclosure: No positions
    Jul 21 7:34 PM | Link | Comment!
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