Ken P

SPY: Taking a Breather, or Is There a Big Drop Ahead?

People are looking at charts and historical market performance as if they have some meaning in our current environment. Apparently what is happening is that the government is giving truckloads of money to the banks (via 0 interest loans) to help them recapitalize. Instead of making loans, they are investing the money in the stock market. This forces up the market and explains why the market is performing so well in an environment where nobody expects corporate earnings to recover nearly so well. The government has no intention of raising rates anytime soon so the market can continue to climb until they do. I don't think the current market rise has anything to do with consumer confidence or earnings expectations or the like. The market goes up when unemployment increases and the market goes up when they they revise the unemployment numbers even higher. When you consider that consumer spending is 70% of the economy that's just totally irrational. The era of rational market is over for the time being. Since the market gains are a big part of the recapitalization of the banks, they (the banks and the govt) have an interest in seeing that the market doesn't crash. So it's hard to guess where it might end, but I don't think the prediction will come from any stock charts.

A Reality Check on U.S. 'Economic Recovery'

I read an article a few weeks ago saying they may allow banks to start renting out foreclosed properties. It seems to me that could greatly reduce the number of properties getting dumped onto the market, allow the banks to make up numbers about how valuable the properties were since they don't actually have to sell the property, allow them to get income, and also tend to minimize the deterioration of neighborhoods and property values from abandoned and vandalized properties. It would also tend to concentrate even more property ownership in even fewer hands, but what else is new?


On Jul 30 01:11 PM Mad Hedge Fund Trader wrote:

> You have to wonder what they are smoking. A handful of positive
> data on residential real estate, and all of a sudden everyone is
> jubilant that the crisis is over. June new home sales popped by 11%,
> while the S&P Case Shiller Price Index flaunted two back to back
> monthly gains. Never mind that these are the same people that have
> been calling a bottom almost every day for the past two years, and
> who themselves have gone broke in the process. It’s a basic law of
> economics that when you drop the price, the volume goes up. We have
> not paid enough penance yet. We have not atoned for a generation
> of under saving and overconsumption. The harsh reality is that the
> torrent of selling is being briefly staunched by a dwindling group
> of first time buyers once priced out of the market, who saved their
> cash, and stayed away from the stock market, and are now buying two
> thirds off the top. Take away the fantastically generous government
> subsidies that expire in a few months, throw in the next wave of
> Option ARM reset induced foreclosures, and this market folds like
> a wet taco shell. I’m waiting to buy at 20th century prices, and
> make that a home with an indoor swimming pool and basketball court.

A Reality Check on U.S. 'Economic Recovery'

Actually I don't think the borrowing against retirement plans is being encouraged by financial parasites this time. The situation in many cases is that people have money in their individual retirement plans and also have big credit card and other debts. Many people opt to borrow from their retirement plan and pay it back with maybe 7 or 8% that goes back into their retirement account and use the borrowed money to pay off other debt that is at higher interest rates where the interest goes to the bank. It's not really a bad deal if you handle it responsibly. Of course, in many cases you are expecting people who have been acting irresponsibly by running up massive debt to suddenly become responsible, but that's another story.


On Jul 30 04:39 PM Jeff Nielson wrote:

> Whidbey, thanks for this eye-opener!
>
> I had no idea there was any mass-borrowing against pension plans
> going on. I wonder which group of financial parasites urged their
> clients to gamble or simply SPEND their futures?
>
> I knew that baby-boomers (all over the Western world) mortgaged the
> futures of their children and grand-children, I just never knew they
> weren't even looking after their own money better.

Is GLD a Good Deal?

My feeling is that Einhorn has read some of the same articles that many of us have. Articles that point out such things as:

- The GLD prospectus is a playbook for a ponzi scheme as a commenter above noted. It basically says they have no idea where the gold his, no way of auditing it, don't know or care if whatever they do have is actually real gold, and that if the company holding the gold goes bankrupt that they could lose the gold. If it were simply an issue of buying gold and selling an interest in it, as most people assume, bankruptcy of the custodian wouldn't be an issue except in terms of outright theft.

- The custodian of GLD, HSBC Bank, is also a huge short seller of gold. As custodian of GLD gold they have a huge pot of gold they can use to cover their short selling activities if necessary. Since the gold can't be audited, it is essentially theirs to do with as they please unless or until they go bankrupt or GLD changes custodian.

- If GLD gold is being used to support short selling activity, then buying GLD is actually helping to suppress the price of gold and hence an investment in GLD.

So if one is serious about owning gold then one buys physical gold and not paper gold like GLD.

Preserve Your Wealth with Precious Metals

One should keep in mind that it's not just about waiting for gold and silver to rise in price. It's also about overall capital preservation. In the current environment bonds aren't safe because interest rates can only go up from here which means bonds will drop in value. If you believe that the Dow/gold ratio will continue to decrease then stocks will either go down in price or gold will go up in price or a combination of both, in any case you want to be in gold rather than stocks.

The only reason to want to be in stocks now is if you somehow conclude that the the economy is not only bottoming, but heading for a robust rebound. And if you conclude that the recent 40% rebound in stocks is not enough. But if you see that, at least in the US, debt levels (both public and private) are high, savings are low, real estate equity has fallen dramatically and continues to fall, unemployment is high and increasing, you might conclude that such a robust improvement isn't likely to happen because the money is not there to support it. If consumers are already maxed out in debt and can't borrow, are increasing savings (paying off debt or putting in savings in these uncertain times), and can't borrow on their homes because they are already underwater on their mortgages, then you might conclude that a robust recovery is not likely in the near future. So if you want to preserve your wealth, you might want to consider precious metals.

Norway Swapping Government Debt for Mortgages

Countries that are net exporters don't want their currency to rise in value too much or else their products become too expensive, so in a way, yes, there is safety in numbers. For other countries to debase their currencies in tandem may produce a certain level of stability in the world monetary systems.


On Jun 30 07:49 AM doubleguns wrote:

> Everyone following our monitizing lead, what do they think?
>
> Safety in numbers?

The macro economic conditions that preceded the Argentinian collapse in 2001 - when foreign investors lost confidence in the government and refused to roll over short-term bonds - are astonishingly similar to the U.S. today.

Yes, the US is in a rather unique position in the world in that other countries loan them money in order to buy their products and then the US gets to pay them back in its own currency!! Argentina couldn't do this because they had to pay back debts in other currencies (quite possibly US dollars) and it was difficult for them to get other currencies once they started having trouble paying their debts.

The US won't ever default because it can always print enough dollars to pay debts denominated in US dollars, but it can drop precipitously against other currencies. As the dollar drops the prices of those commodities and other imports will rise. And maybe this is just temporary but the US dollar has been losing value against most major currencies every month since February. China is the exception and they've been holding their currency steady against the dollar. Since 2000 the Euro has gained over 40% against the dollar. The dollar has been becoming progressively weaker and I believe this trend will continue for the foreseeable future.

On Jun 28 09:55 PM shrike wrote:

> That fiat currency everyone is so bearish on costs nothing to produce
> and is traded for massive amounts of valuable raw materials from
> other countries. Its the greatest racket in the history of the world
> - even better than Rome's tax collectors dispersed all over the Old
> World. We don't even have to collect - they send their commodities
> to us willingly.
>
> Lucky for us most people don't know this.
>
> The Argentines are mere pikers.

The macro economic conditions that preceded the Argentinian collapse in 2001 - when foreign investors lost confidence in the government and refused to roll over short-term bonds - are astonishingly similar to the U.S. today.

The article acknowledges that the US's reserve currency status is an important difference, but there are limits to how far the US can go on its past reputation. Right now the US is like the General Motors of countries. It's big, it's got a long history of stability, and has a lot of supporters who invest in it because of past reputation in spite of the deteriorating fundamentals. Many could never imagine a bankrupt GM and yet here we are.

Believing that the US reserve currency status is sacrosanct is just more of the bubble mentality that got us into this trouble in the first place. Bubbles occur when people believe that the good times will continue for no other reason than that the good times have continued thus far. Then suddenly the bubble bursts and people act all surprised when any look at the fundamentals would have shown that it couldn't continue. Tech stocks couldn't continue growing when companies with just an idea and 5 employees were valued at more than companies making billions of dollars in profits. Housing couldn't continue rising at those rates when incomes were falling. The US cannot continue indefinitely its reserve currency status when it has skyrocketing debts AND deficits, and free-falling incomes. Banks and others that loaned GM money eventually got to the point where they had to decide if they should just cut their losses and allow bankruptcy to happen or put up more money and hope for a turn around. In the end they decided to cut their losses and there's no reason that the same cannot happen between the US and its creditors.


On Jun 28 06:38 PM themackattack wrote:

>
> Ok, similar, save one absolutely over-the-top critical point -- Argentina
> is not the United States. The US Dollar is the worlds reserve currency,
> and until proven otherwise, the US is the leading "safe-haven" during
> times of economic trouble for people the world over. This was conclusively
> demonstrated 4 months ago when people thought the world was going
> to implode, and Treasuries performed incredibly.
>
> Otherwise, yes, conditions are identical. Do you really think the
> results will be?

Hyper-Inflation or Just Hype?

I don't believe that deflation will occur because the government(s) are determined not to allow that to happen. The way to ensure that deflation doesn't happen is to inject more money into the system. With fiat money there is no limit to how much money can be created. That is a recipe for hyper-inflation because at some point there will be too many dollars chasing too few products.

What Does ETF Money Flow Tell Us About Gold?

In the early 80s gold peeked at around $2500 in today's dollars and yet here we are in the midst of the worst financial crisis since the great depression and can't sustain $1000/oz. A reason for this is that the gold market is being heavily manipulated. The motivation for manipulating prices downward would be to help maintain the illusion that the economy is improving and that nobody is concerned because gold is remaining relatively stable. This discourages people from buying gold and encourages them to invest in equities instead.

One way the gold market can be manipulated is via gold ETFs such as GLD. Many believe that they don't have as much gold as they claim to have and/or that they loan out the gold. Either of these will artificially increase the supply of gold which will tend to depress prices. If they loan the gold out there is the risk of default but the investors don't benefit from this risk and there is nothing in the prospectus that prohibits them from doing that. Also you can short sell GLD which also tends to depress gold prices.

If the government believed there was going to be massive inflation and devaluation of the dollar as a result of the huge debt and printing of dollars then it would make sense to hoard what gold it had and then sell it after inflation takes off. They don't want to mint more gold coins because that makes it easier for people to invest in actual gold (as opposed to the ETFs) which would tend to increase demand for gold bullion and push up the prices, which would be counterproductive.


On Jun 13 10:53 PM realold wrote:

> Tne thing that I have not seen mentioned in blogs about gold that
> maybe somone can explain? The U.S Mint has stopped producing gold
> coins, platinum coins and reduced silver coin offerrings due to a
> lack of supply. What does this mean? The U.S. Mint cannot find
> anyone who will sell them gold? Is it possible that there really
> is no gold left out there to buy?

What Does ETF Money Flow Tell Us About Gold?

I'm not sure how anybody can take the idea of deflation in the US seriously -- not because things are not bad enough things to cause it, but because the government refuses to let it happen and can always print enough dollars to keep deflation from happening. The real danger is the eventual massive inflation that will result from all those extra dollars.

Get Ready for Inflation and Soaring Interest Rates

I'm betting on inflation because it is really the only thing that is politically feasible. We've been running deficits for around 30 years I think with a short break during the Clinton administration. Obviously there is no political will to cut spending and even pretend to attempt to balance the budget, much less actually pay down the debt. Inflation allows the govt to cut real spending on entitlements without taking real responsibility for it. People will continue to get CPI adjusted benefits, which will grow much less than actual inflation, but nobody will have to take responsibility for voting to cut benefits. And fixed debts can be paid off in inflated dollars. It's really the only solution that makes any sense for a spineless government that doesn't have the political will to say "no" to any of their constituents.

The Coming Economic Collapse, Part 2

When Obama came into office he said that digging ourselves out of this hole we are in is going to be a long painful process. People want to believe that the worst is over, the stock market is rebounding, unemployment is moderating, and we will soon return to the land of milk and honey. And this is all within 5 months of his being sworn in. I don't think what we have gone through so far is either long or particularly painful considering it's the worst financial disaster since the great depression, which lasted 10 very long and very painful years. This is NOT going to turn around in just a few short months.

The US is essentially bankrupt and since there's no international bankruptcy court to wipe out its debts, it is going to inflate itself out of debt. Essentially it will print enough dollars to pay off all its debts. This will lead to massive inflation, but imagine if it had inflation like Zimbabwe where they revalued their dollar by removing 10 zeroes!! Essentially someone holding just one US dollar could have bought enough Zimbabwe dollars to pay off all their Zimbabwe dollar denominated debts up to a few years ago. Hopefully things will not get quite that bad in the US, but it is really the only way it can get out of this debt.

My guess is that the US will try to fix the health care system to limit its growth, cut back on debt through inflation, and cut back on Social Security and other benefits by increasing them at the CPI (which is far less than the actual inflation rate). This will be the painful part that no one talks about.

What the US is doing now is trying to do as much as it can with whatever money it can get from China and other countries while it still has a decent credit rating. Kind of like realizing you can't make your credit card payments anyway so you go out and buy even more stuff on credit before filing for bankruptcy.

Once it achieves this the US can then work to become a responsible member of the world economic community.

Will a 'Silver Bullet' Finally Kill the Metal Manipulators?

I read somewhere that Saudi Arabia has built their own storage facility and is planning to start taking possession of and storing their own gold that is currently stored in London. I don't know how much gold they have, but with any luck this type of large scale claim for physical gold will start the ball rolling.

How Today’s 2.46% Dividend Yield Could Destroy Your Wealth

More and more people are putting their money in gold and silver, the traditional places people put their money to preserve capital. If the dollar continues to drop or inflation kicks in as a result of growing deficits and debt monetization, then gold should continue to increase in value.


On May 30 09:25 AM dividendmachine wrote:

> I liked the article but feel that investing is 50% art and 50% science
>
>
> Mr Weber is correct about the dividend yield but there are 2 variables
> that if were mentioned ,were not mentioned in this article
>
> 1) Many of the banks that cut or eliminated their dividends will
> no doubt restore them given that one of the steepest yield curves
> ever will inflate bank profits
>
> 2) Where else is anyone going to put their money
>
> Real estate which was the choice after 9/11 when interest rates were
> last this low is in shambles and makes many nervous
>
> Money markets rates are pitiful and many who prefer the safety of
> cash can not live with 1% T bill rates much longer
>
> Buying a dividend paying stock,many of which exceed 3 % will eventually
> be the alternative IMO
>
>