If you like what you read consider a donation

Tuesday, November 30, 2010

The robbing of a nation occurs under the illusion of freeing its citizens from a brutal economy.

Imagine you have worked hard all of your life and did the right thing providing for your family and saving for retirement. Many people through out the world have been doing the right thing all along and now they are being cheated by the very systems that they supported. For many years people have contributed to various pension plans around the world; here in the US people are familiar with the IRA and 401K, which are most prevalent these days. In the past at least in the US many people went to work for a company and upon retirement they received a pension as the company took on the fiduciary responsibility to fund pensions. As time marched on due to many factors one of which was the cost to fund and administer pension plans companies opted to shift to a more “do it yourself” approach giving rise to the aforementioned IRA and 4101K. The various vehicles we have for retirement savings are to be used on top of the retirement entitlement born from the Great Depression known as Social Security.

For many years now there have been questions regarding the viability and sustainability of the Social Security system. I for one am not counting on the grand payouts from the social security system as I have doubts that it will even be available to me once I retire; either it will become in some way a victim to the current financial debacle or they will resort to “means testing” and God willing I would place outside of the limits set to be able to collect.

Around the world people are finding “monkey wrenches” thrown in to their retirement plans as rapacious governments look for revenue by turning over every couch cushion hunting for quarters, dimes and nickels. Don’t believe that a government could raid a pension? Well, dear reader, the concept of raiding the pension system to shore up a budget shortfall or provide for the common good is not a new concept; as recently as 2008 we learned that the leadership of Argentina took a $29 Billion bite from the pension apple to fund Presidente Cristina Kirshner’s vision of the government. Even as far back as 2001 the Argentine government had already swallowed up $3.2 billion in pensions setting the precedent for the even larger confiscation 7 years post.

On November 25th of this year Hungary made moves to bring $14.6 Billion of privately held pension assets under government control to attempt to reduce the government budget deficit and debt. Sure individuals could opt out and keep their pension private but they will lose their government pension and a significant portion of future pension contributions. The scheme is as one of the quotes in this linked article put it best; “This is open blackmail” and a” rigged deal”.

In one of the latest “bailout” deals the Irish are not happy with the terms of the situation, in fact there is a great quote calling it the longest ransom note in history. I don’t want to get in to the specifics of the deal but needless to say the Irish need to come up with $23 Billion of their own funds for the “rescue” and  it is going to be in the form of both cash and pension reserves. The estimates are that the pensions will be raided for $10 – 12 Billion.

Now there are rumblings out of France who recently made headlines with riotous protest over raising the retirement age by 2 years; just imagine what might happen when the French people really get a handle on the fact that their government is raiding their pension funds to the tune of €36 Billion to pay for welfare debts. SO when they figure out that not only will they have to delay their retirement but also the payouts will be less because of needing to fund welfare programs, suffices to say I would not want to be a French politico at this juncture. After all the French have been know in the past to take their government to task all the while yelling “off with their heads”.

Are you noticing a pattern here dear reader? As governments are forced with their backs to the wall they will take what they want regardless of who owns it after all everything we have is only on loan from the government. You say that can’t be true but wait I will prove it to you; let’s say you are living the American Dream and have bought a house. You have been diligent and paid your mortgage for the past 30 years and have even had your “mortgage burning” party, something practically unheard of these days. You now own your little piece of America free and clear, and you run in to trouble and start missing your property tax payments due to a lost job or some such other unfortunate circumstance curtailing your income. A few months pass and you still have not made payments for property tax you figure no problem at least you still have a roof over your head; only you come to find out that after a period of time the town or city takes ownership of your property. In essence you may have bought and paid for the home but it is really only a long term lease for as long as you can afford it. Even money you have already paid tax on and worked for your entire life is not truly yours as upon your death it is taxed yet again before you can pass the remnants along to your heirs.

So why do I bring this whole pension raiding affair up in the first place? To start with I just want to point out that even “sacred cows” appear not to be so sacred any more. Moreover, there is now precedent after precedent of Governments that are cash strapped looking to methods of what amounts to essentially extortion to plug the holes in various dykes both for good and bad reasons. Once again the refrain from many amongst us is that is just those crazy South Americans and Europeans and something like that could never happen here, to which I say really?

Back in October of 2008 Teresa Ghilarducci proposed a solution to retirement funding problems for workers in a report entitled “Saving Retirement in the Face of America’s Credit Crises”. The basic jist of the report was to limit the deductibility of IRA and 401K contributions and offer and alternative $600 tax credit and a new type of account that offered an annual return guaranteed by the government. Ghilarducci later proposed to Congress yet another idea in the wake of the October 2008 stock market meltdown that “Congress allow workers to swap out their 401K assets, perhaps at August levels, for a Guaranteed Retirement Account. Just a onetime swap for a guaranteed retirement account of government bonds that pay 3% real return” Sounds pretty harmless doesn’t it? The problem is the way things operate in Washington this was what is known as a trial balloon. A trial balloon is where a new or radical idea is floated and even if it does not pass in to existence the first time it reappears over and over until it begins to be accepted. Usually only part of it is accepted and that opens the door for law makers to begin to tinker with it once they realize they can get their meat hooks into whatever it is. Notice the benign wording as people would be allowed to do participate in the guaranteed retirement.

Flash forward to May 2009 where Ms. Ghilarducci presents her Plan for Mandatory Universal Pension System all the while criticizing the Obama plan to push individuals to save 3% in 401K type plans with a government match. She then goes on to explain why 401K’s are flawed vehicles for retirement savings due to their commercial nature and investors inability invest properly as well as the fees associated with the plans. She proposes a universal mandated fund that is to be funded by both contributions from employees and employers of 5% of salary per pay period. A tax credit of $600 dollars indexed for inflation is proposed for all workers regardless of income as she puts it since there are those who make to little to be able to contribute, of course this begs the question of why give that credit to people who can afford it? The funds are then to be part of a quasi government agency that will be held accountable and hire professional money managers to guarantee retirement income on top of social security indexed to inflation for life.  Still sounds benign, but notice dear reader the 2nd trial balloon moved from “allow” to “universally mandated”. Let us not forget that this is a woman who has the ear of congress and this particular topic appears to be her mission in life.

So I do not know where this potential pension mess is going dear reader but based upon the planted seeds and the situations happening with pension funds around the world it is a subject worth watching. Those of you who stand by and believe that things like that do not happen here are living in denial in my opinion. I do not have a crystal ball but it would not surprise me to see the Government view our IRA and 401K balances as potential panacea or at least a temporary remedy for what ails some part of the economy. Just as social security turned out not to be sacred and the funds were raided over time leaving us in a social security shortfall today, our retirement funds are not safe either. I could see the government trying to implement this type of an asset grab in a piece meal fashion first on a voluntary basis, but then as some crisis hit moving to make it mandatory to buy certain bonds or investments in our retirement accounts. The stage has been set between ideas proposed to Congress and the asset grabs in the name of public good around the world. I am reviewing ways in which to allow individuals to protect these assets form seizure but it is a tricky subject and I will let you know what I find out when I know more.

Thursday, November 25, 2010

Happy Thanksgiving - and a quick update so the family won't kill me!

**********Additional Information from Korea*11/25/2010 11:30pm*******************
The following news article appeared in The Korea Herald today, N.K. strike appears tied to succession, and they suggest that the North Korean Attack was about the leadership change. Instead of handling this situation all players from Washington to Australia are acting like incompetent ninny's. If this situation spirals out of control it will not be North Korea's fault it will be the failure of diplomacy for not recognizing the game that has been played for decades and instead escalating the situation rather than diffusing it as well as the media for hyping a situation and making it appear worse than it should ever have been made to look. If I had to bet I would say this whole incident was constructed to kill 2 birds with one stone; 1) lend credibility to Kim Jong Un and 2) prepare for bargaining for food as I am sure that their crops are just as adversely affected by the weather as many of their neighbors so the yields could be pretty low for the North.

In my "Socratic Method"  post on the 23rd I presented the notion that the Korean Drama was being used to bolster Kim Jong Un's reputation As usual the Western media was firing on all cylinders hyping the Korean situation as the prelude to Armageddon, however, it appears to me to be more of a statement trying to lend a bit of the Kim Jong Il toughness to his son and soon to be leader Kim Jong Un.

*****************************End Update**********************************

I hope everyone is enjoying their Thanksgiving as even in the midst of this economic mess we all still have much to be thankful for.

A quick update to yesterday's post which posits the notion that external forces are acting upon the inertia of the Dollar comes the latest article from Bloomberg.com(not some wacko conspiracy site) showing yet another small stab at US Dollar Hegemony. Dear reader you can read it for yourself and see if you draw the same conclusions that it is yet another potential "chink" in the US armor. "Putin Proposes European Trade Zone Stretching `From Lisbon to Vladivostok'"
Once again wishing all the best.

Moneta Advisors

Wednesday, November 24, 2010

No Post for Thursday

I hope all my readers enjoy their Thanksgiving.

You can read yesterday's (Wednesday's) post "A Trend In Motion Tends to Stay In Motion...Until It Doesn't"

A Trend In Motion Tends To Stay In Motion......Until It Doesn't

Our old friend Isaac Newton developed his laws of motion and published them in his work entitled, “ Philosophiae Naturalis Principia Mathematica” in 1687. The law basically states that an object in motion tends to stay in motion, unless acted upon by an external or outside force. I tend to think of the market in terms of the laws of nature and physics although not exclusively but there are many areas of the markets that do seem to obey the rules of nature. Dear reader you may be asking yourself yet again has your humble author lost his mind, how does this law of motion apply to the markets and why should I care; I will try and explain below.

The Bretton Woods agreement, which had its genesis out of the ashes of WWII in 1945, established institutions that we know like the IMF (International Monetary Fund) and the International Bank of Reconstruction and Development that we today call the World Bank. The Bretton Woods Agreement, so named after the Ski Area in New Hampshire where it was agreed to in the confines of the very elegant Mount Washington Hotel, established a monetary management system for commercial and financial relations between the countries of the world. The chief upshot of Bretton Woods was to establish a monetary policy in which each country would maintain an exchange rate of its currency with in a fixed value at the time plus or minus 1% in terms of gold; the IMF’s original charter was to bridge any temporary gaps or imbalances in payments in this world trade system. It should be noted that in 1971 President Nixon took the convertibility of the Dollar out of the Bretton Woods equation but that is a different discussion and not important to the jist of this missive.

The Bretton Woods agreement eventually gave rise to the US Dollar as the worlds reserve currency a privilege that the US has enjoyed for just about the last 70 years. The US has been able to use its special status as the Sovereign of the worlds reserve currency to allow the “American Empire” to not only grow very large in size but also to essentially live well above its means, not that I am complaining having been a beneficiary as a proud US Citizen.  Along with the reserve currency a light needs to be shined upon the BIS or Bank of International Settlements. The BIS was actually established in 1930 so it is actually an older institution than the IMF or even the Bretton Woods agreement. I don’t want to delve in to the murky history of the BIS and the fact that it was once owned by a combination of government and private parties and even had shares that traded on exchanges; instead I would point out that today the BIS is wholly owned by member central banks. Moreover, the BIS is the conduit through which world commerce settles and the BIS settles its transactions in the reserve currency aka US Dollars. In other words if lets say Italy wants to buy oil and they go out in to the market to do so they must first convert their currency to US Dollars in order to settle the transaction. The old saying “money makes the world go round” is true but from a trade perspective it is “US Dollars make the world go round” and it has been that way now for several generations.

To paraphrase the thinking of Newton, the Dollar has been a trend in motion for the last roughly 70 years and is continuing on that path, however external forces are beginning to act upon the Dollar.  As early as 2000 just after the launch of the Euro there were rumblings in various corners to try and exert external pressure on the Dollar to break it’s hegemony. In November 2000 Time magazine carried an article in which Saddam Hussein claimed that Iraq would no longer accept Dollars but Euros instead for oil , as he did not want to “deal in the currency of the enemy”. One could easily argue that Saddam was a bit player and never really got any traction with this issue, however, after 9/11 I theorize that part of the reason he was targeted in the “War on Terror” was more due to his threats regarding Dollar hegemony than terrorism. Although I have never heard any statements that would corroborate such a theory, but a loss of reserve currency status poses much more potential danger to the American way of life than any terrorism that Saddam supposedly plotted. Let’s put aside the conspiracy theories and move on to the next data point.

We all know that China who holds a very large amount of US Debt is unhappy with the currency situation that the US has created and lately has been critical of the FED’s QE. China has been not only vocalizing their dissatisfaction, but also they have been attempting to reduce the amount of US Dollars they hold and as a result have been on a worldwide buying spree especially of raw material assets they will need to grow their economy. Back in March of 2009 China and Argentina were near a $10 Billion Dollar deal to allow trade in their respective currencies. Then in June 2009 China and Brazil agreed to trade in their respective currencies bypassing both the US Dollar and the BIS. This year, Iran announced that currency reserves are going to be held in Euros rather than Dollars facilitating oil sales outside the Dollar Standard; this was mostly a political move to escape US pressure but it adds fuel to the anti-Dollar fire…no pun intended.

The Russians have been very vocal about their anti-Dollar feelings and in the irony of all ironies have taken to lecturing the US about hwo to run a capitalist system, but I digress. This leads me to the story coming across the wires today“China,Russia Quit Dollar”; the Chinese and Russians have agreed to conduct trade in their respective currencies.

Bit by bit all these currency agreements undermine and dilute the original Bretton Woods agreement and in turn take small steps to removing the reserve currency status of the Dollar. As I have stated the Dollar has been the defacto standard for a very long time and it will not be dethroned easily but the external forces acting upon the Dollars forward inertia are growing. Deals like the ones mentioned appear to be growing and the G20 being another indicator suggests that the disdain toward the Dollar and US monetary policy is growing causing a lack of faith.

The problem of course is what would replace the Dollar as it is the deepest market and has grown to handle all the volume of world trade; some would suggest that due to all the money printing it has well exceeded all the volume of world trade. There has been much talk about using an IMF currency of sorts called a special drawing right or SDR, but that is unproven and potentially very inflationary as it is essentially a bookkeeping entry not backed by anything.  There have been many ideas floated regarding baskets of currencies and even Robert Zoellick has suggested some sort of gold backed currency; I am certain that over time the world will arrive at some standard but the process will be long and drawn out.

Followers of this blog already know my feelings about the Dollar under the current stewardship of “B52 Ben”,   “Turbo” Timmy and the rest of the cast of characters who have abused the “Dollar privilege” to such a degree that the world is seriously looking for exit strategies. The Dollar’s reserve currency status is most definitely under attack and little by little chinks are appearing in the Dollar armor; the more of these chinks that appear the easier it is for other players to make their own deals and further erode the Dollar’s status. There are many people out there that consider the loss of the Dollar’s reserve status impossible or very far off in to the future; I am more concerned about “Black Swans” at this point regarding the dollar. I am concerned that it will be some innocuous event that will cause many players to abandon the Dollar in rapid succession and only history will be able to clearly see the events that lead there but those living through the situation will continue to have their blinders on. It is no different than the murder of the Archduke Franz Ferdinand of Austria in 1914; while those living then may have seen that this would cause Austria-Hungary to declare war on Serbia but I am certain very few were prescient enough to recognize that it would have been the genesis of WWI.

These reasons are why I am constantly harping on the fact that one should make sure that their net worth is tied up in “things” that will retain value in spite of the dollar at least in nominal terms. In a situation like what I believe we are facing the winners will be the ones who preserve their wealth and the real lucky ones will be the few who mange to expand their wealth. Those who subscribe to the theory that we cannot have very high or hyperinflation here in America because either it has never happened before or because we have not printed that much money or any other rationale ignore the fact that severe or hyperinflation are not just a result of money printing but of velocity of money cause by lack of confidence in said currency.

As I have stated before while inflation is always a monetary event conversely a severe or hyperinflation is more than a monetary event it is a human nature mass psychology event. The continual Dollar bashing along with the erosion of the reserve status through the currency deals becoming more frequent are a warning sign to be heeded. Nothing would please me more than to be wrong about this but with that in mind my suggestion is “prepare for the worst but hope for the best”. Take steps now to protect yourself just make sure that the steps you do take are not detrimental to you if by some miracle everything returns to the good old days. In the mean time each little force is acting upon the dollar and if it gets to a tipping point the Dollar could fall out of bed suddenly instead of slowly, we have all been warned.

*******************************UPDATE FROM YESTERDAY*******************************

As a follow up to yesterday's post "The Socratic Method" in which I also discussed the North and South Korea incident. The bargaining is already beginning and nothing has transpired since the incident yet the MSM(main stream media) is still unnecessarily hyping this story as it plays on peoples nerves and sells more dog food via commercials than stories about peace love and tranquility. The North did not directly attack the mainland due to their calculus that this their chosen action would get equal press coverage but the situation is much easier to diffuse since they are like a bully who makes threats but is fearful of actual confrontation, it is the North's modus operandi to create false tension in order to either enhance their bargaining position or obtain something and here is the start of that.


Tuesday, November 23, 2010

The Socratic Method..........

Today the investing world’s focus has been distracted by the events on the Korean Peninsula and their shot(s) broadcast round the world. While there is no way to know for sure but it would appear that the North Koreans are posturing as the shelling unleashed made headlines and killed a couple of unfortunate South Korean Marines on an island, but did not inflict real damage on the mainland. As usual the Western media was firing on all cylinders hyping the Korean situation as the prelude to Armageddon, however, it appears to me to be more of a statement trying to lend a bit of the Kim Jong Il toughness to his son and soon to be leader Kim Jong Un. This seemed to me as a tactic to be used as a bargaining chip when North Korea ends up in six way talks with its neighbors and the US. Not surprisingly the Russians were out screaming the sky is falling and this situation could escalate; of course the Russians have been aligned and extremely supportive of North Korea even dating back to Kim Il Sung II in 1959 so it is not surprising that they would pull out the stops to help create the illusion of impending catastrophe to strengthen their allies bargaining position and also subtlety stick a thorn in China’s side as a bonus.

Instead of catastrophe I believe it is much more likely that North Korea under new management wants something possibly to help alleviate the deplorable conditions in country as they know that to retain power they need to feed their people. The quote from Napoleon, “An Army marches on its stomach” comes to mind, but  the North Koreans have modified it to “the ruling class retains its power on the public’s stomach”. There is much fear that the North Koreans who purportedly have nuclear weapons might use them, however, just as the theory of MAD (Mutually Assured Destruction) gave pause to the US and USSR in the cold war, the North Koreans would do the calculus and realize they would not survive a retaliation. If the North was to utilize nukes it would not take much to retaliate and fuse the entire peninsula in to a giant hunk of glass. The net result  was the Koreas were one factor weighing on investor’s minds today, however, I think this will amount to little more than “news cycle” drama that will have little to no lasting investment impact.

Also weighing on the markets was the FOMC (Federal Open Market Committee) minutes because the FED lowered its expectations for economic growth. The FED’s statement cited tight credit conditions, weak residential and commercial real estate and a “high degree” of caution by consumers and business.  All I can say to the FED’s statement is Duh!

Dear reader if you have been following this blog the FED minutes are not at all shocking.  If you have looked around your neighborhood, talked to people and just lived your life outside the vacuum of the phony baloney media happy land you already knew what the FOMC disclosed today, so it is no surprise. The fact that even a revision of the third quarter GDP upwards to 2.5% from 2.0% did nothing to juice the markets leads me to believe that the FED will continue on the QE path to ensure that assets don’t slide too far down in to the feared deflationary spiral, dissenters be damned.

Meanwhile across the pond investors are relived that it appears that the Irish eyes may not be smiling but at least they will be smirking since the budget cutting and both the EU and IMF bailout plans appear to be taking hold in the Celtic country. While questions still abound there is positive momentum in Ireland.

This brings us to the next worry which is Portugal since I believe this is but a warm up for the big one…Spain first then Italy. Portuguese Prime Minister Jose Socrates has a tough job. He is trying to institute austerity measures in the country as a result of Portugal having the fourth largest deficit in the EU. Portugal initially took the ostrich approach and buried it head in the sand so they have been slow to react. Socrates has been battling the unions who are upset and looking to take to the street in protest of a hiring freeze, a 5% wage cut for those making € 1,500 or more per month as well as raising the VAT 2%.

By the numbers Portugal’s deficit is comparable to that of Germany at 4.6%, however, unlike many of its neighbors economic growth has been virtually at a standstill and is projected to shrink 1.4%. So even though Socrates is making the hard choices it comes as no surprise that there would be protests and strikes that will hobble the country just like occurred in France. While Socrates has announced these solutions to combat Portugal’s budgetary problems the bond markets appear to be wagering that his methods are far from certain in their implementation, resulting in a pretty dramatic rise in credit default swaps.

It is my contention that Portugal will also receive a bailout plan of sorts and the contagion will march through the Piigs. As the situation gets deeper growth estimates will be cut particularly since the EU relies on exports and with one of their largest consumers the US scaling back the EU will be forced in to their own QEuro (QE). It is only a matter of time before things get unsustainable in EU land as you can see by the reactions of the populace it is fine to talk about budgets and austerity as long as you are imposing it on someone else; it is no different than in the US when there is talk about raising taxes or cutting benefits it is fine when it affects someone else but raise my taxes or cut my entitlements … no way!

So in light of all that transpired today it was interesting to see that both Gold and the Dollar rose. Gold rose in the face of options expiration which has tended to create pretty good downswings in the past, but today it showed strength instead. I found it fascinating that the bubble heads on CNBS (aka CNBC)  were blathering on about how the risk trade was now off and the safety trade was on; a new dynamic must be in play then because it was not even a couple months ago when the safety trade was considered to be only the US Dollar and gold would be sold. It seems to me that we could be entering a phase that is supportive of both gold and the dollar rising at the same time which would be a negative for the markets. Of course tomorrow is another day and we will have to see what comes out of this abbreviated business week as short weeks like this can be anomalies more often than trend setting. Here is to cooler heads prevailing tomorrow.

Monday, November 22, 2010

Consistency requires you to be as ignorant today as you were a year or years ago.

I was going to write about a different topic for today but as soon as I saw the article regarding Barney Frank on Bloomberg.com I became very upset and decided this was just as important as my other topic.

Barney's lack of understanding shows through now as much as in the past, which is why I borrowed the title quote from Bernard Berenson, the Boston raised and Harvard educated art critic who died in 1959. As you know dear reader I do not like to write about political issues and prefer to stick to the markets, however, at a point when the governments share of the GDP is growing and now accounts for just under 44% of GDP up from just under 37% two years ago I think you have to look at politics as they have a direct impact on your investments.

If you don’t believe that politics can play a part in your investments just ask one of the poor bondholders from Government Motors. You may feel dear reader what is the big deal about the GM bondholders, in the first place if it was your bond you would think differently and in the second place the coercion to force bondholders to accept a deal that was an abrogation of contract law hurt the US and sets poor a precedent for the future. One of the things that made America the investing capital of the world has been our rule of law and respect for property rights, but that era has passed for expediencies sake as opposed to making hard choices.

Let’s get back to our pal Barney and his article “Frank Defends Bernanke, ‘Appalled By Republican Critism of FED Chairman’”.  Frank says he is appalled by Republicans who he claims have sided with foreign central banks in criticizing Bernanke. He is very distressed because he claims it is Republicans joining China in criticizing and it is very distressing to him. He goes on to call the $600 Billion that “B52 Ben” is printing up via QE a very reasonable thing “that is not fueling inflation”.

Of course “BarF” as I like to call him (I must give credit to zerohedge.com for that one) has training as a lawyer and not an economist in fact he has never held a job in the private sector let alone run a business or met a payroll. I know that for many years he sat as the Chair of the Financial services committee where he had the ability to prevent the financial mess we currently find the US in but instead he was just intoxicated by his own power, which he demonstrated frequently by bloviating and attacking anyone who disagreed with him. Now, however,  he wants us to believe that he knows what the outcome of “B52 Ben’s” money follies will be. He takes it one step further by trying to pontificate that opposition is based upon a partisan divide and using politics as usual he is trying to smear the opposition and obfuscate any rational discussion as to the outcome of the money printing.

Well “BarF” we may not have inflation here now but the inflation that we are not experiencing is being exported in large quantities elsewhere. Why do you think the Chinese are raising reserve requirements at the banks or the Korean’s raising interest rates? It is not because they want to but because they have to since their economies are growing and the capital that “B52 Ben” is printing up in the basement of the FED is sloshing everywhere but here….YET.

Frank Goes on to say “I wish we had some more fiscal stimulus”. “In the absence of that, given unemployment, given the complete absences of inflation, he is doing a reasonable thing”.  Well “BarF” we have had the FED produce on the order of about $3 Trillion to fund your so called idea of the remedy that ails the economy and what do we have to show for it? We have exported inflation waiting in the wings for us at some point and a stubbornly high unemployment rate, all in all not a lot of success for the price tag. Notice how he says he wants more of it, of course he does so there can be more money for wasteful spending and transfer payments, none of which will help the economy in the long or short run.

Why should we listen to “BarF” just because he has an opinion and he is the current and soon to be the ex Financial Services committee head? “BarF” has a total lack of experience in the real world and he possesses virtually no knowledge about how an economy works or a business operates, yet he managed to hold on to the Financial Services chair strictly due to politics and went even further to author a financial reform bill that did not repair the major problems. It is simply astounding to me that this was allowed to happen, I am not saying that he needs to be an economic expert but at least he could have some knowledge of economics, the real world and maybe have held a job outside of government. You would not elect someone attorney general if they were not an attorney so why put someone in charge of the political arm of the economy when they have no background whatsoever in it.

So “BarF”, forgive me if I do not side with you on your calls to not criticize “B52 Ben” and his lunacy, but your track record on identifying economic problems is less than stellar. Moreover, it appears to me that the calls criticizing “B52 Ben’s” money adventure is hailing from more than just Republican corners but of course it make better press coverage when you inflame like that.  If you recall in 2003 when Barney stated that Fannie and Freddie were fundamentally sound and even if they were not they would not be bailed out by the Federal Government. Once again in 2005 Barney was out there on TV claiming that there would be no collapse in Fannie or Freddie and that it housing was not a bubble. He even went further to state that the degree of leverage was not that of the Dot Com situation as these homes are owner occupied. Instead we will see an ebb and flow in house prices but not a collapse and that you would continue to push for homeownership. Remember all that…I did not think so Barney, especially since today  in 2010 you are out on the TV  bloviating that you were always critical of the homeownership aspect of housing and only wanted to push for rental housing. Moreover, in the ultimate irony you state that the Federal Government should not be sticking its nose in there. Simply unbelievable.

I have included a link to a couple ads from Barney’s opponent here in Massachusetts that plays along the lines discussed above since they are kind of amusing. Ad Number 1 , Ad Number 2 and the most humorus Ad Number 3.

Please understand dear reader I am not a Republican nor am I a Democrat I was raised to look at the individual and what they stand for and cast my vote to elect the individual that I believe will do the best job regardless of party; and I have voted for politicians in both parties. I really take exception to “BarF” because I live in his district and I will honestly tell you I voted against him as I cannot stand his partisanship which is exactly what creates the climate of decline we are currently trapped in. The only ideas and actions that Barney likes are the ones he or his party came up or allow him and his ilk to spend your money at alarming rates.

So the bottom line here is that I believe that we should all let “BarF” know that we disagree with his assessment and he should stick to learning to be able to identify pot plants and becoming the outdoors man that he is not currently. The real implication here is that like him or hate him “BarF” still has influence and he will push to keep the printing presses rolling and something tells me that he is already posturing to aid “B52 Ben” with QE3 since QE2 is just barely maintaining the status quo. In effect this is Barney's version of MOPE.   Long live the Assignat!...er I mean Dollar!

You can call Barney to tell him what you think at (202) 225-5931 or email him (you need to put in Massachusetts and use a zip code in his district like 02459) or Fax him 202-225-0182.  Let Barney know that “B52 Ben” is misguided and so is he.

Thursday, November 18, 2010

Law of Entomology: There Is Always One More Termite

It just seems so apropos to use a bug related title for this post because it seems that everywhere I look today there are termites gnawing at the framework of society, government and business. Since this crisis began in 2000 we have had some respites along the way but we seem to keep ending up in one more unbelievable crisis than the last. Moreover, what seems to be a small termite on one side of the globe has an effect on the other as these days we are all globally interconnected. I have already discussed at length in these pages the FED’s QE and its termite effect on emerging economies; the QE termite is souring US relationships with emerging economies via exported inflation resulting in publicized backlashes.

Dear reader the above information is old news, instead today’s termite action hails from the EU and Ireland in particular. Not that long ago Ireland was listed amongst the wealthiest of nations, yet today they are plastered all over the media as one of the poster children of debt and bankruptcy. Ireland has earned the dubious distinction of being either the first or second I in the “Piigs” acronym, not exactly where they want to be I am sure.

The termite in this case is the EU itself and it has managed to eat through the European framework in record time. The Euro zone had its political roots much earlier, but for all intents and purposes; the termite was building its nest until 1999 when the Euro was introduced with great fanfare to the world. Slowly the bureaucrats at the EU came up with new regulation upon new regulation and tax after tax; sound familiar? The new EU overlords feasted until they have consumed the golden goose as governments always do. If one tax is good then more taxes are better until stifles productivity and the same is true about regulation.

It has gotten to the point that the Irish people feel as if they are losing both their sovereignty and identity. At the same time Ireland’s debt and unemployment situation are growing increasingly untenable. Ireland is in a depression with GDP having fallen some 20% and this basically a result of the Irish being part of the EU. In a prior post I discussed how Europeans view themselves by national identity and that is why they do not have cohesive economic policy that will work for them; Ireland’s problem is a manifestation of this.

It is apparent that nothing will change for Ireland unless they can throw off the shackles of the EU and move on. This scenario raises the specter of who will bail the Irish out? Will it be the EU, the IMF or even the “Benbernank”(aka “B52 Ben”)?  If “B52 Ben” did get in to the act what do you think the reaction would be, dear reader, I am sure it would not be good. Additionally, a US intervention would set a dangerous precedent and potentially put the US on an even quicker path to self destruction. At this point Ireland’s Finance Minister Brian Lenihan is claiming that Ireland does not yet require a bailout per news reports, however, as we have seen in the past these things have tended to mature in to a problem sooner rather than later. Mr. Lenihan also stated that Ireland is in discussions to see what kind of action could be taken that would not pile more debt on to the Irish sovereign or endanger the savings of the Irish people. That does not sound like the truly solvent country that Lenihan would have you believe does it?

Exacerbating the problem has been the raids by the large banks …ahem Goldman, Morgan and alike who seized upon this opportunity to capitalize on Ireland’s weakness and attack the Euro based upon assumed Irish problem. Don’t believe that the Goldman boys would do something like that to artificially create havoc to profit, just think back to the Greek Debt crisis when they were shorting the very swaps they arranged .  The actions by players like Goldman shorting the Euro and trying to drive it in to a ditch are wreaking havoc with investors and countries worldwide and for what?; their Christmas bonuses? These people who partake in these currency and sovereign bond attacks and manipulations are a termite of a different breed and no they are not doing “God’s Work”. It is one thing to short something because you believe that it is overvalued or there is a problem but to use basically unlimited capital to break a whole currency is just plain immoral.

I also believe that it was no coincidence that in the midst of this whole Euro mess which is helping to boost the dollar temporarily that the CME would go after margin limits not once but twice! It just seems too convenient almost as if the CME got a call from the Boyz that this would be a good time to raise limits to smash the commodities market allowing them to covertly unwind positions; afterall they are the largest players in the CME space. The Boyz have had their undies in a bunch since the CTFC has been showing a bit of swagger and they probably know that they have to get out or long by some privately known date and they have a s#!tload of shorts to deal with. Of course Mr. Market was going against them in a big way and they needed a diversion to aid them in their deleveraging process lest they keep taking it on the chin with no end in sight. I would not put it past them to set the wheels in motion for a Euro zone problem and pour gas on the fire to kill two birds with one stone, smash the commodities(metals in particular) to clean up as many shorts as possible and make some scratch blowing the Euro apart. The Boyz definitely have the motive and they have the means so I believe this is interconnected. I am not convinced at that the Boyz are through with the CME as in the midst of a nascent bounce in the commodity complex the CME dumps another news item bound to rattle some across the newswires “CME CEO Defends High-Frequency Traders”. CEO Craig Donohue said that high frequency traders are not “deleterious” to markets, I don’t buy it and it just means that we are moving from a manipulated by banks market to an algorithm controlled market and will result in incredible volatility in the future just like the stock market. It sure looks to me like the casino just keeps getting bigger and badder.


Since I wrote this last night I see in the news this morning that a EU bailout is forthcomming and gold is returning to  its upward trajectory and the dollar downward for now...All I can say is welcome to the baillout  party EU and soon you guys will be doing the QE dance too.

Tuesday, November 16, 2010

Dudley Do Right To The Rescue! Yet another MOPE installment. - Random Thoughts

An article on Bloomberg appears today entitled “Dudley Says QE2 Critics Don’t ‘Understand’ FED’s Exit Plan”, in Which Federal Reserve Bank of New York President William Dudley tries to convince us that we just don’t get Bernanke; I guess it is obvious to the FED that they are losing credibility and these interviews are the solution. This reminds me of the shareholder calls I listened in on when I owned Enron shares back in the day where they were trying to convince us how they were going to make money by building excess fiber capacity; after hearing that I sold at a teeny tiny profit (whew!). Of course we should all listen to and believe Dudley because he is one of the smartest guys in the room.

Dudley thinks that the market is underestimating the FED’s ability to raise interest rates when needed. He also would like us to believe that the FED can have an enlarged balance sheet without a long term inflation problem. He then breaks into song “Don’t Worry Be Happy” as the FED is confident of their ability to exit when the time comes. I am sure just like with the Y2K debacle and the more recent housing bubble where the FED knew just what to do.  As I said in my post “The New Alchemists” the tools at the FED’s disposal are old and worn with limitations that even the FED can’t change because they are still bound by the laws and principles of economics; although Bernanke, Dudley and Yellen would like you to pretend otherwise.

In the meantime the Dollar is gaining because of the current Trifecta China, Korea and the Euro. The Chinese have raised rates as you know dear reader and the Koreans Followed suit. The EU zone is a mess because the markets want the Irish to accept a bailout, which the Irish for reasons of both pride and the fact that they feel they don’t need a bailout since they have funds to operate well in to 2011, are saying no. The whole EU is in a tizzy and as remarkable as it sounds the Europeans are running to the safety of the Dollar. The ECB plays these games from time to time with member countries and the large banks seize the opportunity to speculate driving the Euro down. Suddenly the Euro picks up since problem child du jour, this time being Ireland, accepts the bailout and bonds are issued. The Euro rallies as the bonds are sold because it sells well, all the while the ECB is printing up Euros to make the purchase. The Europeans at the moment are cleverer than old “B52 Ben” as their QE is more like a covert Black Ops campaign put together by Activision.

Back in Gotham City, dear reader, the Bond Market has taken a path of its own, even with “B52 Ben” hitting the Nitrous button revving the QE engine beyond the red line; pumping another $5.4 Billion in to Treasury Coupons today. In spite of all the extra juice the FED has jammed in to the bond market traders and analysts are puzzled as to why it is selling off. This could be the beginning of the implosion I talked about in my post “MOAB – Mother of all Bubbles”; I believe that the US Government Debt Bull was one of the two remaining “ultimate bubbles”, to steal turn of phrase from George Soros. This rise in rates has caused the dollar to climb and investors to sell off gold, silver and commodities. If rates were rising due to a hot economy then I would buy the gold and commodities sell off scenario, but our economy is not booming instead it is limping along like some poor 3 legged dog. I have said earlier the only reason we don’t have RAGING inflation here is because we export it to the inflation capacitors in the emerging markets, like China and Korea who recently raised rates…”I am shocked, shocked to find inflation going on in emerging markets here”  as Captain Renalut from Casablanca might say.

I would argue that the largest part of the selloff is due to the CME rule changes that go in to effect today. The CME is implementing a rise in margin requirements as a way of protecting the exchange; however the new margin level increases the carrying costs of those involved and CME has spread the rise across the whole of the metals sector.  The rises range between 5% to roughly 11% per contract and it varies by metal and size of contract. I believe that the rise in contracts greatly exacerbated the selloff since the price was being adjusted to reflect the new realities of cost on top of the world monetary gyrations; similar to the way a stock drops after a dividend is paid.

Normally falling bond prices mean higher interest rates and therefore commodities tend to sell off; this however is not always the case. Back when I was a kid in 1979 I can still recall we had rising rates a la Paul Volcker and yet we had rising gold and commodities. At the time traders believed that the dollar would rise and everything would fall but it did not work out that way. The people involved in the bond market know the jig is up at this point and even Bill Gross the notorious bond bull from PIMCO has been telling anyone that will listen that bonds are history and he has shifted his portfolio.  The US is living beyond its means and the FED is enabling it while saturating the bond market with QE that will not enhance GDP or create much needed jobs. The net result of the overcrowding in this trade is that interest rates have nowhere to go but up. At the moment rates are ticking up and affecting the mortgage market QE2 be dammed; I am sure that this will hurt the poor housing market yet again.

I believe that we are about to enter another period of aberrations where interest rates will rise, but the dollar rallies will be sold as the reason for the dollar rise is the unloading of the newest risk asset over-monetized US Treasuries. The net result is there will be a flood of dollars looking for new homes to store value, in other words be converted to something of value. So even as rates are high the resulting inflation of dollars seeking escape from treasuries here and aboard will keep a lid on the dollar as people will not want their currency to be in dollars at least not for more than transactions.

In the meantime we have had in the past couple weeks, the “Vampire Squid” sucking the life from the economy ,Goldman coming out calling for $1650 gold and others as well; you know dear reader that if there is money to be made Goldman is there taking their slice of the pie from whatever is circling the world’s drain. The way for them to make the most is to be long things from commodities to gold. They are already long and continuing to buy on weakness I am guessing, so they are setting the trap and just waiting for the rush in which is why they put out these articles. You have to give them and the House of Morgan some respect after all what other companies do you know that can go quarter after quarter with 0 to 1 days of a trading loss; unlike the rest of us mere mortals. In the meantime it will be interesting to review this week’s COT reports to see who is going short on this down leg; I would contend that it is not the banks or big boys but instead the speculators who will be used as cannon fodder.  I am betting that Goldman and the other boys are getting longer things while the rest of the frightened “sheeple” are going short thinking that it is a one way express to easy moneyville. Remember you have to ask yourself who is selling here and for every seller there is a buyer. Sure commodities of all flavors could go down from here it is possible, however I believe that the Goldman gang will keep acquiring and at some point be able to put the screws to the shorts and drive prices much  higher like the big boys did in the 1979 rising interest rate and dollar environment. The difference is that the economy today is weaker and rates will have to keep ratcheting up causing dollars to keep rolling in stateside; the higher rates will make all the QE and defcit financing ever more costly for the FED and Treasury all the while putting upward pressure on inflation as the dollars are repatriated.

Monday, November 15, 2010

Sorry about the late post....

Over the weekend I read several articles from various sources that basically stated that the run in US Equities, commodities, gold and especially silver are essentially over and they have well outpaced inflation. Sure gold and silver are in corrective mode which is exactly what you want to see for a couple reasons. First, bull markets climb a wall of worry and lately there seems to be plenty of that going around.  Second, corrections allow you to average in at a lower price, however, most people will not as Richard Russell says the bull market will work to carry along the least amount of people possible.  I don’t just believe that it is gold and silver that needed a breather, US equities in general and commodities all are extended and needed to come off and base for a while.

What amazes me is that when you read or listen to the various people out there providing market analysis it never fails that they feel that the stock market is a predictor and it is always looking ahead regardless of what is going on presently. Several of the articles I saw made the case that the commodities markets have outpaced inflation and therefore are doomed to fall. It is interesting that if you look at the environment via the BLS’s CPI reports you can make a case that inflation is not keeping pace with the commodities market, however, if you look at it through the lens of the real world living or shadowstats.com then it is apparent that inflation is drastically understated and has been for a while. Moreover, just like the stock market, commodities are not reacting to the news of today but rather sniffing out inflation 6- 12 months out. While the precious metals markets do react to day to day news because they are both very small markets and directly influenced by the currency markets which have become the craps table du jour. For this reason it is not uncommon to see rapid rises and drops in the metals as the confidence in paper ebbs and flows particularly in terms of store of value.

So at the moment we have some interesting things happening around the world. In Europe Ireland is following in Greece’s footsteps and acknowledged that its debt problems are getting worse. The Portuguese are voicing their concerns over the Irish condition as their economy has been affected by what the Prime Minister called the “contagion effect”. If you read the article you get the sense that there is a serious problem but no different than the Sub Prime mess here everyone is being told ”move along nothing to see here”, where have we heard that before. This instability has lead to a drop in the Euro and a converse rise in the Dollar. It is not that the Dollar is so much better a currency but rather because the DXY or Dollar index which is the measure of the Dollar against a basket of world currencies is up since the EURO comprises 40% of said basket. Now there are questions arising as to whether or not Ireland has just become a puppet of the EU due to its debt problems. The problem with the EU unlike the US is that there is history, nationalism and diverse economies all woven up in to the Euro and this causes friction and when push comes to shove human nature takes over. If you notice in the article the Portuguese are hoping that the Irish will do what is in the best interests of the EU and not Ireland; therein lays the problem for Europe. The US by contrast due to its melting pot nature has one national interest even though each area of the country maybe very economically and geographically different we still all think of ourselves as Americans first and not based upon our state at the highest level; meaning that while I may not reside or have been born in a particular state but if asked my nationality is American not ”New Yorker” or ” Bay Stater”. In  Europe even with all the talk about the EU when the “marde” hits the fan the French, Germans, Spanish, Italians are loyal to their own countries first and the EU second. The remedy to this is that the EU out of Brussels will try to impose discipline and usurp the sovereignty of member nations in trouble, we will see how long that files.

Just recently we saw how well the French handled part of the very tough austerity measures being imposed, yes I am being sarcastic, by protesting when the retirement age was raised by 2 years. The French were out in the streets rioting because of the increase, see it is ok to scold and punish the Irish or the Greeks but don’t touch my benefits that cost too much.  It is for reasons just like this that when the “austerity” decisions get tougher I believe that the politicians all across Europe will do the time tested action, they too will join the FED and monetize so the people will get their benefits at a much reduced rate but they will get something. What will happen in France if they try to cut something of real significance?

As if on cue, a juicy little tidbit comes out of Greece to prove my point that every country will do or try to do what is in their perceived best interests. The Greeks admit to breaching their bailout terms just as they are about to be audited. It is only a matter of time before the EU jumps on the QE bandwagon, and this does not even take into account the problems the UK is currently facing with their draconian cuts.

Moving over the G20 debacle and I use that term kindly as it was an embarrassment to the nth degree and put the US in very weak and poor light in my opinion. Whether you voted for Obama or not is irrelevant at this point, we needed him and his administration to put in a good show at the G20. Instead we got one fantasy Asia trip that yielded supposedly a 10 billion dollars in Indian business deals that will supposedly create 50K US jobs, kind of like the 3 million jobs saved or created I suppose.

During the G20 itself the US took several body blows and essentially walked away with nothing. Granted the position of the US has changed from day’s gone bye where we could dictate how things would be handled and the rest of the world followed suit, those days are long gone. The problem is that we have a ‘leadership gap” and the world knows it. Even under the Bush administration ,of which I was not a big fan, the US commanded more respect and could lead instead of being berated by China and others on the world stage. In the past it would have been the job of the Secretary of State and or Treasury to work in advance and come up with compromises that the “Leaders” summit could agree to; and if there was no agreement then expectations would have been downplayed unlike what happened this past week. Instead that did not happen and put our President in a position of weakness that neither the US nor the world can really tolerate at this juncture. In plain terms Obama was made to look like the weak wet behind the ears leader that he is and this is not good for any of us. In the end the upshot of the vaunted G20 meeting was a statement that basically holds no water and doesn’t address any of the current problems at least not in any manner that has teeth.

So the current market thinking has been that since the President and his agenda have been rebuked in the Mid Term elections and now by the G20 that these outcomes are bullish for the Dollar.  In the first place the feeling is that the Obama administration can no longer wreak havoc on the economy with their attack on the private sector and expansion of government. In some respects it is true that the worst of the Obama agenda is over or on hold, which is a plus. The flipside is that the Republicans do not have the power to overturn what has been implemented and both sides have very different views on where to cut if they can even come to a compromise. So I predict that there will be no real budget cutting and the size of the government will probably stay in the current range .

The G20 was a further rejection of US policy and some feel that the FED will back off of its current path due to pressure from the world, which would be bullish for the dollar. The notion that the FED would change course is ludicrous as the mission of the FED is to protect the banks and government and the only way to do that is to inflate away the debt, it is not like we addressed this issue 10 years ago when it was first starting and now “the US government has become the ultimate too big to fail”.  The world knows and the FED fully understands that failure is not an option and allowing the dollar to rise would have a perverse outcome not only for the US but also many of our trading partners.

Ironically, the Chinese are the ones most vocal about the Fed policies, but they are caught in a tricky spot as they don’t want the Yuan to appreciate and they want to stem capital inflow due only to the FED’s QE2. The Chinese implemented a rise in the reserve ratio, which is the amount of capital a bank has to keep on hand, that should help to contain some of the money from flowing in to the economy. Additionally, the Chinese have stated that they would conduct their own open market operations to combat the FED’s QE and they also are using capital controls limiting real estate purchases by foreigners to for the same reason. The Chinese face a choice of either allowing the Yuan to revalue which would end their inflation problem or they need to institute controls to deflect the “hot” money looking for better returns. If they let the Yuan rise then their products get more expensive in other markets and presumably their volume of sales would decline, where as if they can keep the peg on the Yuan the costs for consumers will stay in a more acceptable range and the volume will remain more or less level but would stoke domestic inflation. This is China’s Achilles heel, since they still do not have a sufficient internal market to not care about what happens elsewhere on the globe, unlike say the US of the last century.

Today Joesph Stiglitz, the economist, came out urging emerging economies to put in to place capital controls due to the in rushing liquidity as as result of QE2. Stiglitz, is concerned that countries like India do not have a method for dealing with the influx of capital and worries about inflationary pressures there, where as Brazil and China have an idea as to how to handle such a problem. If countries around the world follow Stiglitz’s advice then capital would be limited or shut out of many markets which could do two things. First it could cause various countries around the world to be starved for capital and hurt their export markets as their currencies would rise against the Dollar. Second without the relief valves of foreign markets Bernanke’s QE would find a home here and ignite the inflation that he seeks. Of course this inflation could run very hot and very quick to the upside which would be very Dollar bearish.

It appears as if the Korean’s are not heeding Stiglitz’s advice and they are planning to hike rates .25% tomorrow too to cool off inflation in their economy; although without capital controls this will just serve to draw in more Dollars chasing some yield.

Lastly there is talk about the proposals put forth by the National Commission on Fiscal Responsibility and Reform, a bipartisan commission that Obama commissioned. The proposals coming out of the panel purportedly will save $4 Trillion from 2010 -2020. Included in the proposal are discretionally spending cuts such as :Federal pay freezes, cutting the size of the federal workforce, reducing costs inside the department of defense, reducing foreign aid, earmarks and scaling back military bases. Then there are the reductions to Social Security, Medicare, Medicaid and a plethora of other programs and agencies. Furthermore, there is the idea to close various tax breaks like the mortgage deduction and imposing completely different tax brackets across the spectrum. So the idea is to lower but broaden taxes, cut waste and entitlements to reduce spending, seems like a no brainer to me. Upon the release of the details of this plan we became “Europe”. Everybody is all for fixing the problems as long as you don’t touch our portion or entitlements. Virtually as soon as the information hit the press and was announced the special interests got to work and began to go after their own specific area that is affected. The bottom line is that there is no way that we are going to come to a consensus on this as a country and our “leaders” are far too concerned with getting reelected and rather than jeopardizing that prospect to do the right thing they will just kick the can down the road. The Tea Party and their candidates campaigned on the notion of controlling spending and deficits, but I will wager that when push comes to shove they won’t back things that adversely impact their constituents.

I draw the conclusion that while I believe the game that Bernanke is playing is dangerous and inflationary a determined FED will win the day. It does not matter how much the world belly aches their actions demonstrate that nobody is willing to cooperate or sacrifice for the world good. Instead human nature is going to win out as usual and it will be every country for itself monetarily. The US will not default and they continue to print and send mixed messages so the rest of the world will do what they need in order to protect their interests. Obama, Geihtner and Bernanke want to have their cake and eat it too, but the world wants its slice. If you combine all the messages from the three main players it should be obvious that we want a weak dollar, strong dollar, export, and non export economy. Is it any wonder why it is every country for itself?

So while I do believe that the Dollar is getting respite I am not buying the argument that this is a new trend but instead a relief rally and will peter out shortly.  I believe that the Dollar Horse is pretty tired and after this knee jerk reaction people will again begin the process of getting out of Dollars while the getting is good. Is it coincidence that on this past Friday that when everything stocks to commodities was down so was the Dollar which would have normally been the beneficiary of such a day; this suggests to me that investors and traders are questioning whether the Dollar deserves their confidence. As for the fall in everything it indicates a general confusion in the markets due to the effect of the “Chinese rate hike” announced and the fact that everything has been rising for weeks and needed a break. Time will tell but I believe the Dollar is running in to severe resistance due to lousy fundamentals and techincals.  If the Dollar can overcome resistance here at the 50 Day moving average at 78.69 it could rally to test the 200 day at 81.78 which is more formidable; however the angle of ascent is quite parabolic and the relative strength is weak while the Stochastics are signaling everyone’s favorite “overbought” as well. The flipside is assuming the inverse correlation of gold to the dollar it could test all the way down to the $1300 level before resuming its upward march along with the commodities and equities markets. Gold is not yet oversold although that does not mean it has to go down to oversold especially in a bull market. Furthermore, the 50 day moving average is still below at $1328 and trend line support is all the way down at $1250. Let’s hope we don’t need to test trend line support, but even if it was tested the uptrend would still be intact, but progress upward would take longer. The equities and commodities markets should resume their upward path shortly in my estimation.


Quick add on this AM - Talk about can't convince them keep them confused check out the two articles I just came across...they need to put this as an example of contradiction in the dictionary...


Soros Bets on Health Care, Dumps Gold
By Eric Rosenbaum
11/15/10 (TheStreet) — Soros Fund Management, the fund management arm of billionaire investor George Soros, bulked up on health care and biotechnology in the third quarter, according to the hedge fund manager’s quarterly filing of portfolio holdings, released after the market close on Monday.

At the same time, the famed hedge fund manager notably shifted away from gold, one of his favorite investments.

… One of the biggest position decreases for the Soros funds in the third quarter was gold. Soros decreased his stake in the SPDR Gold Trust…

Barrick Gold and Newmont Mining were also among the Top 10 position decreases for Soros in the past quarter.

Soros also entirely sold off stakes in three mining companies: Ivanhoe Mines, Golden Star Resources and Gold Fields.

Soros also sold out of some other notable stocks in the third quarter outside the mining sector.


Soros Increased Gold Positions In Third Quarter

By Alistair Barr
November 15, 2010 (MarketWatch) — Soros Fund Management LLC, headed by George Soros, increased gold positions during the third quarter, according to a regulatory filing late Monday. Soros held 4,697,008 shares of the SPDR Gold Trust and 705,000 call options on the gold ETF at the end of September, the filing showed.

Soros also owned 5,000,000 shares of the iShares Gold Trust at the end of the third quarter, according to the filing.

Three months earlier, Soros held 5,244,697 shares of the SPDR Gold Trust, a portion of which was a shared position. The firm held no shares of the iShares Gold Trust at the end of June, according to the filing.

Such regulatory filings don’t include all positions held by investment firms. Many derivatives, direct commodity holdings and short positions aren’t included.

It is obvious no one really knows what is going on anymore!


Thursday, November 11, 2010

WTF is an ETN ?

By now most investors are familiar with the concept of an ETF or exchange traded fund. It seems that ETF’s are like the weeds of the stock market a new one pops up every day and there seems to be an ETF for anything you can think of from financials to commodities and everything in between; in fact I would not be surprised to find them issuing an ETF for the porn industry (NYSE:SEX) and market it claiming it always rises or some such rubbish. ETF’s are actually a very useful investment vehicle and can have a home in virtually any portfolio.

For those of you who do not know what an ETF is, think of it as a mutual fund that trades on an exchange like a stock. An exchange traded fund can be broad in nature and track the S & P 500 (NYSE:SPY) or the NASDAQ Composite (NASDAQ:QQQ) or it can be very focused like the Powershares Water ETF (NYSE:PHO) or SPDR Gold Trust (NYSE:GLD). ETFs offer the investor the opportunity to diversify as well as target certain areas of the market or economy that might outperform. In recent years ETFs have given investors even more access to commodities and currencies areas that John Q did not have easy access to in the past. Today you can log on to your brokerage account and with the click of a mouse diversify your portfolio or go long the Yen, Short the Pound, buy silver or sugar ; in fact the options have become almost mind boggling.

Dear reader you may be asking yourself why is this any better than a mutual fund, a good question. Some of the advantages of an ETF over a mutual fund are lower costs, transparency and liquidity. As I mentioned and ETF trades like a stock on an exchange so it can be bought or sold as long as the market is open and will be filled just as quickly as a stock transaction; a mutual fund by contrast will take your order but perform your buy or sell transaction after calculating the NAV (Net Asset Value) once the market has closed.  Moreover, ETFs tend to carry far lower management fees than mutual funds of the same variety which can impact your return substantially especially over time; if you are diversifying by trying to mirror an index like the S & P 500 does it make sense to pay a hefty management fee for a mutual fund when an ETF like the SPY will perform equally well with far lower holding costs? As for transparency the holdings of ETFs are listed on the web in various locations and are updated frequently where as mutual funds tend to release holdings information in prospectuses that are out dated and this can make it difficult to know what you are holding. Knowing what your funds are holding is important because you want to make sure that your funds are invested in assets or areas that you think will perform well and you want to make sure your holding are not redundant as this can add risk.

So dear reader you now have heard me blather on about ETFs but my headline mentioned ETN’s and you are asking yourself WTF is the difference; I will try and explain. Most people see an ETN like I-Path DJ-UBS Copper Total Return Sub Index ETN (NYSE:JJC) which tracks the price of high grade copper futures on the New York Commodities Exchange. If you look at JJC it has done very well as copper prices have rallied thanks to the FED’s QE policies.

Even though an ETN like JJC trades on an exchange and shares many of the same characteristics of an ETF it is fundamentally different in some respects. As an ETN this security is really a bond not a fund yet it pays no interest instead your interest is the return on the underlying index or commodity. While you are able to participate in markets like the copper market with JJC since it is designed to track the copper market without, you dear reader, having to use or understand complicated and risky instruments like futures. You need to understand that when you plunk your hard earned cash to buy shares in JCC you are not actually buying copper. Instead you are buying the Barclays Bank’s promise that they will pay you a return as measured by the underlying index, the Dow Jones UBS Copper Index. So in essence dear reader by purchasing this ETN you have become an UNSECURED CREDITOR of Barclay’s Bank. Just like many things in life there are no guarantees and for this security to work and retain value requires that Barclays Bank Stand behind it. If Barclays should run in to trouble then your investment could be at risk even if it is unrelated to the ETN itself. This means if hypothetically that a rogue trader was to place some bad trades in one of Barclays other divisions and brought the company to its knees, I know that would never happen, then you would have to stand in line behind lots of other creditors as a bankruptcy judge carved up the distribution of Barclays remaining assets. That does not sound like a thrilling proposition especially when it is your capital we are talking about.

In contrast ETFs are fall under the prevue of the Investment Company Act of 1940, which requires that ETFs are chartered as separate corporations of which you are purchasing shares. An ETF will have a board of directors and a manager to keep everything on the straight and narrow. Moreover if the parent company for an ETF such as HBSC for the SPDR Gold ETG (NYSE:GLD) went belly up the fund and its holders would be unaffected from an investment loss perspective since it is its own company. Even if HBSC were liquidated the fund would continue operations and not be subject to the bankruptcy arena. There is a slight potential for disruption as the board may seeks a new manager but the underlying assets and your investment is not in harm’s way.

Most investors have no idea about the difference between an ETF and an ETN so now you are ahead of the game. To me the failure of the industry to educate investors about the various investment vehicles is a prime example of the SEC (Securities and Exchange Commission) being asleep at the switch. Many investors don’t even realize that they may be potentially increasing their risk by playing with these ETNs which are essentially derivative bonds. By derivative, I mean that the value of the bond is derived not by owning the underlying asset but an institution’s promise to pay against an index that tracks the actual asset. Investors that buy an ETN take on extra risk versus an ETF which most if they knew would not do. An investor has to be willing to take on market risk like all investments but also adds corporate risk as well. If you don’t think it is an issue just remember that we are living in precarious times and even the too big to fail can fail. Remember 2008 when Lehman went under they had ETNs such as, Opta Lehman Brothers Commodity Index Pure Beta Total Return ETN (RAW) and it went in to legal limbo. For a period of time it appeared that Barclays was going to pick up the ETNs from the Lehman debacle but ultimately they passed on this liability. The investors in this ETN suffered a total loss. The lesson is if you are going to buy and ETN realize you are taking on extra risk and make sure you check the credit rating and stability of the issuing company. ETNs are a true case of caveat emptor, “buyer beware”, and shame on the securities industry for not educating the “sheeple” but herding them instead.

Wednesday, November 10, 2010

GM : The Retread...

There is much fanfare again over the fascist poster child “Government Motors” as it appears they managed a $2.16 Billion profit (undiluted) in the third quarter. Cue the trumpets and streamers, fire up the band and set off the fireworks!!!  Yahoo, all is well in America again as goes GM so goes the nation….call me a skeptic but something stinks in this deal.

Wow the government and the media must think we are all either really stupid , forgetful or this is part of the if you tell the lie large and long enough it becomes fact. I mean come on already. I know GM has an IPO coming out next week that the Government is hoping to scam unsuspecting saps to purchase so as to extract our collective money. I am buying stock in Avon as there is not enough lipstick in the world to put on this pig. Look I am as American as the next guy and grew up with GM and I would like to see them succeed but by their own merits would be good.

The site Pro Publica has a breakout of the entire bailout history for General Motors and according to their log, Government Motors was committed $50,744,649,329 (in spite of the fact that the media keeps throwing around a $52 Billion figure) which in essence accounted for just about 80% of the company. According to my memory and Pro Publica’s documentation the entire $50+ Billion was in the form of loans to be paid back, as well as equity stakes in the company to be sold later to retrieve a fractionof  our money at a supposed profit.  If you count the fact that they carved out GMAC Financial and rebranded it Ally then the figure loaned to GM under the Automotive Industry Financing Program is actually more like $66 Billion; GMAC received $16.2 Billion. For the current discussion we will not look at the Ally figure.

If you think back dear reader to April 26th there was much talk in the media and the White House about how GM was paying back $4.7 Billion to the US Treasury and $1.1 Billion to the Canadian Government. . It turns out that GM made the payment by robbing the taxpayer to pay the taxpayer with TARP money, yet somehow this was let to slide. GM must have learned well from the FED and did their own version of money from nothing. What they did is a kin to trying to raise the water level in your pool by taking buckets of water from the deep end and pouring them in the shallow end, yet they get a media celebration and not even a reprimand at the least; I am sure that because at the time this was uncovered by a Republican Senator and being the minority in both houses it got squelched to avoid any embarrassment to the Democrats….for shame and for the record I would feel the same way if the parties were reversed.

So today GM is reporting again with great fanfare that its net income was $2.16 Billion. If you look at the balance sheet on a diluted basis earnings were just over half of what is reported at $1.3 Billion. I think with the available information that GM is very difficult to truly value properly. Some analysts like Deutsche Bank’s Rod Lache feel that GM should be valued at $64 Billion which would give it a pricey PE of about 23 times diluted earnings and almost $43 per share with the full 1.5 billion shares issued. Mind you dear reader that at GM’s peak in May of 1999 GM had a market cap of only $61.3 Billion.

“GM plans to raise as much as $10.6 billion by selling 365 million shares at $26 to $29 each, according to a Nov. 3 filing with the Securities and Exchange Commission. The company also will offer about $3 billion of preferred shares that later will become common stock. GM has said the offering may price as soon as Nov. 17.”  GM is only issuing an IPO for 365 Million shares but the initial buyers will be diluted for quite as they will issue new shares in the future to rid themselves of the governments remaining 40% stake. So if we take GM's word for it and the shares are issued at $26 and all 1.5 Billion trade at that level the company would sport a PE of 13. No matter how you slice it GM will be more expensive compare to Ford, their American competitor who is also profitable sporting a PE just under 10, but did not take any government money.

The Car Czar, Steven Rattner, appears to be optimistic on GM and he claims that through the sale of the treasury’s stock they will make $7 Billion, he seems to forget that until all the loan is paid back the US is not making anything it is just recovering principal; so there is still risk. He feels that GM is definitely on the right path, but he is the car czar does anyone truly believe that he would say anything negative, especially with a new book “Overhaul” out now.

Additionally, GM’s pension liability which was one of the issues that got them in the mess in the first place is growing in this last quarter it grew $3 Billion from $26 Billion to $29 Billion to me this is a warning flag.  Moreover, GM is stating that they can earn $19 Billion using the rosy assumption that vehicle sales return to near the lofty levels of 17 million a year; that sounds great for an IPO presentation but that is hardly a realistic figure to expect those kinds of returns. The current book value per the GM balance sheet ((Total assets – intangibles) – total liabilities) stands at a fictitious $26 Billion, since their loan payments(liabilities) are on hold by Uncle Sam. GM is going have this IPO offering to pay back the Government, but they are in a capital intensive business that requires constant investment for upgrading. Ideally GM would need the capital from the IPO to handle the capital spending requirements and deal with their pension gap. The  money raised by the IPO is not going to GM’s coffers like in a regular IPO but instead the shares are “granted” to the government who will sell them into the market as a result GM shareholders returns are going to be impacted going forward because the money needed for GM’s operations has to come from somewhere and that will be their EPS meaning investors will get the short end.

“Chief Executive Officer Dan Akerson, who took over from Ed Whitacre on Sept. 1, has said GM can make “significant” profit even amid a U.S. auto sales rate that is running about 30 percent slower than before the financial crisis. “ Sure any company could make these kinds of numbers if you apparently never have to make any loan payments.

“The automaker, 61 percent owned by the U.S. government, reduced costs through bankruptcy and is selling new cars for higher prices. Once again if you discharge all the debt they owed through bankruptcy then of course they will make money, now if they actually had to structure their debt and pay it they would still be in a deep hole.

“GM’s numbers were as advertised and they were good,” said Joe Phillippi, principal of consulting firm AutoTrends Inc. in Short Hills, New Jersey. “As they ramp up production -- assuming people like their cars -- in three to five years, they could be hitting some much bigger numbers.” There are a lot of assumptions built in to this  for sure ranging from the ability of GM to actually contain costs and introduce better models than the Volt, which you may have noticed has disappeared from public view.

The problem with all of this is that GM was given a bye in this whole process and has not really had to cope in is financial issues in the sense of balancing between investing in their business, cost cutting and being forced to make debt payments while conducting regular operations. There is much talk about cost reductions; however, if it were not for the benevolence of the US taxpayer GM would still be in a world of hurt at best. Just by the nature of everything being made so simple for GM and the Unions once they are out from under the thumb of the government how long will it be before they revert to the ways of old. If I had to bet on a manufacturer I think Ford has much more “Street Cred” than GM even with their real cash and liability position. To paraphrase an old Smith Barney tag line “they made their company the old fashioned way they earned it.

So GM is going to offer 1.5 Billion shares which assuming the shares trade at the IPO price technically takes the taxpayer’s percentage of GM down to 40%. Of course the Government can’t sell all the shares at once or it will crater the market. Right now the pundits are predicting that the US will make a profit by selling the taxpayer’s equity stake because they believe the shares will trade up to $45 each.  Of course all of this is predicated on GM sustaining its sales momentum and that is tricky as they may not continue their streak of introducing interesting models, keeping costs down or if they have some sort of manufacturing problem that calls GM’s credibility in to question. As an investor I would want to see a bit more of a track record before plunking down my cash as 2 successful quarters does not a good investment guarantee.

The thing that bothers me about this whole scenario is the numbers don’t seem to add up at this point. The Taxpayer’s stake is reduced to 40% after the IPO, yet the remaining debt is still sitting not being serviced, I know I would love to get the terms that GM got when I take out a loan. At this point with GM I am like Missouri “Show me”, it needs to prove itself more than just a couple quarters. Maybe I will miss out on some upside but until I feel more comfortable with the earnings projections and the debt situation, I’ll take Ford instead.

Disclosure: No position in Ford anymore....No position in GM

Chaos is a name for any order that produces confusion in our minds.

George Santayana who is most famous for the quote “those who ignore history are doomed to repeat it”, provides the title quote; which was found in his book “Dominations and Powers: Reflections on liberty, society and government”. The point Santayana was making is that just because we don’t recognize the order of something(s) our brains automatically label the situation as disorder. Part of the reason I have taken to writing these blog posts is to help me look for clues to make order out of chaos. It has been apparent to me for some time that we are living through both a shift of paradigm and balance of power. The news and events come so rapidly at this point it is almost impossible to keep up with everything of importance that occurs. The key is to try and filter out the noise and focus on the items and issues that alter the existing structures of the economy or politics; because just as plate tectonics broke apart Pangaea and created the land masses we recognize today other forces are realigning the world’s economic “plates”.

Some politicians and economists are calling the current situation a war, not a hot war but a form of cold war. It is a war but 0f restructuring mainly due to the West’s greed and abandonment of the principles that made Western societies prosperous and great, rather than a war of  armies, bullets bombs and missiles. I don’t care if you are of the liberal or conservative bent as both have left their fingerprints at the murder scene of our way of life. We live in a world where we pretend markets are free and trade is fair and maybe it was so once upon a time but today is no fairy tale.

Today’s world is an epic struggle of bureaucrats and politicians versus the natural order of things. Instead of free trade and markets we have governments intervening and in some cases controlling many aspects of the markets, trade and daily life, not just here in the US but around the globe. For example, the Chinese have their currency pegs, the FED has QE ad infinitum the Aussies were threatening a mining super tax and I am sure there are thousands of other examples if you look (like the whole EU nuff said).

The bottom line is that all the players of the game are managing things from an “ethnocentric” vantage point. What I mean by ethnocentric is that policy makers who are a product of their cultural and moral up bringing make decisions based upon that criteria. We here in the West particularly in the US have a tendency to believe that everyone thinks the same way we do and therefore will respond like we do; but nothing could be further from the truth. I hate to pick on our friends the Chinese but they demonstrate my point very well. The Chinese as you know, dear reader, have what one would call a centrally planned economy and not everyone in China likes it I am sure but it is what they know and as a result they work with it. Part of Chinese culture and practice is to plan in advance and stick to a plan to achieve the end goal. As a result of this mindset the Chinese government sets out 5 year economic plans and they recognize that to achieve their ultimate ends may take longer than that but it is accepted and incorporated in to the next 5 year plan. Now contrast this to the mindset of the US where we can’t even formulate a national energy policy for the next five years or longer and this has been going on for almost the last 40 years since the oil shock of 1973. In other words they plan and we react.

I used to think that we were constantly getting bombarded with news because CNN gave birth to the 24/7 news cycle. It seemed like the media always had to go find what every meaningless trivia about Michael Jackson, Kim Kardashian, Lindsay Lohan, Tiger Woods, OJ Simpson or the Octomom so they could to fill all the air time. Then even when there was a news event of some sort the media would fill hours rehashing the same old news and having discussions until the cows came home. Now it seems that the media is not having any problems locating material to report on, of course we also are not privy to the items that are being spiked and never make it out of the news room.

Everyday there are multiple major events transpiring and at times it seems like the world is going to spiral out of control almost like some crazy 2012 prophecy. This is when you need to take a breath, and go out and play with the kids or just take a long walk to clear your head. I know it seems like chaos but realignments of wealth and power always do, the difference between this period of time and say the Fall of Rome or even the decline of the British Empire is the US fall from grace is being televised; and you are living in the 24/7 reality show “Benny’s Real World”. This real world comes at you in a non-stop fashion via TV, Radio, Newspaper and the internet so it appears like there is no escape unlike the past. Items whether truly news worthy or not are blasted around the world in nanoseconds as oppose to what used to take weeks in the Roman period or even days for the British decline.

This morning I am looking at the proverbial tea leaves and cow entrails known as the news media reporting reading between the lines searching for the big picture puzzle pieces. The first item of interest is yet another shot across the bow for the US and the FED in particular. In a Bloomberg article the Chinese reveal that they plan to tighten control of capital inflows to their markets. This is a response directly to the FED’s QE2 and an effort by the Chinese government to keep as much of the newly created hot money from invading their markets and further driving inflation as was the result for them of QE1. Yesterday I had thought that “Benny” was covertly giving the Chinese a “face saving” way out of US treasuries, but apparently the Chinese view things through a different prism. Instead I believe the Chinese are reacting to what they perceive as “Benny” trying to make Yuan pate by allowing the “hot money” to be forced down the gullet of the Chinese economy forcing the Chinese to either revalue the Yuan or have rampant inflation. Of course this being a nonlinear period of time the Chinese reacted to preserve their best interests and who could blame them as that is basic human nature.

It will be interesting to see if other emerging markets follow suit with capital controls of their own, because this would cause an unexpected outcome for “Benny and the boys”. If nations around the world do begin to adopt capital controls you would more than likely see a race not to the bottom but to the close, as in closure of capital markets. The end result would be that the dollars created by QE2, POMO and general liquidity would end up remaining inside the US; this in turn would accelerate the pace of inflation domestically and result in yet another bubble or bubbles.  In addition to the bubble(s) you would see dramatic price rises in things especially imported items since our inflation would not be driving inflation in markets where we get “stuff” from but our own; the countries that export to the US would be demanding more dollars for the same items to compensate for the devaluation.

So again before the G20 leadership meeting, China is posturing, in part to draw attention away from the fact that they are still contributing to the global imbalance by maintaining their currency peg. Of course they are maintaining the peg because as human nature would dictate it is in their interest as it gives them an advantage. It would be my contention that the Chinese will maintain the peg until it no longer suits them and the idea of capital controls just says to me that they are not through with us yet. The Chinese have used their cheap currency and lived with the inflation it creates because as I said before they are planners. It would be priceless to be a fly on the wall in top level Chinese government economic planning sessions. I believe that the Chinese have allowed us to delude ourselves in to the paradigm of we will do the thinking, designing servicing and you will do the manufacturing as a model for long lived prosperity. This is a dangerous trap as wealth and security for that matter are a direct result of manufacturing not servicing. If America had the same economic model in WWII as we have today the world would probably be speaking German, because we could not have ramped up manufacturing even close to the needed level to overpower our enemy.

I would contend that the Chinese are more than happy to trade trinkets for dollars of little value so as to acquire infrastructure, technology and knowledge. At the end of the day the Chinese end up holding all the solid capacity and we end up with a society that has lost 8+ million manufacturing jobs and has a lack of production capacity to make the things we need and or want; but at least we have lots of shiny I-pads and LED TVs. When the point comes that either we make it to difficult for the Chinese or we are no longer willing to build and essentially give them our technology they will be done with us; they will move on just like the “Goldman Vampire Squid” and suck the life blood out of the next victim economy whether that is the EU, Brazil, Canada or Australia I cannot tell you as they are investing or should I say divesting themselves of dollars in those countries already. The difference thus far is the aforementioned countries are allowing their resources to be scooped up to feed the Chinese dragon, where as America pretended to be so advanced “investing” in China all the while slowly draining the life blood from the economy.

The argument goes that China cannot and will not do anything to upset the apple cart since they need our market; a fact that is rapidly changing. To start with China is establishing itself as the Asian hub for business and the local hegemonic power, which gives China markets locally. The second is a simple matter of demographics. China has a population of 1.3 Billion and let’s say only ¼ of the population becomes middle class with disposable income that is about 325 Million people a market bigger than the whole population of the US and almost the entire population of the EU; that is a lot of people with a demand for improving life styles. Additionally, the notion that the Chinese would not make a short term sacrifice and essentially “screw” the US is another demonstration of an ethnocentric view point as I believe if it fit in with the Chinese longer term plan they would do what it takes to accomplish the end goal. Their central control allows them to do things to offset the loss of that capital and they would view it as a cost of doing business.

Dovetailing in with the idea that if it was in the best interests of a nation they would act in a manner that might not benefit the US is another headline form yesterday. On the Business insider website an article brings forth thoughts from Citibank’s Steven Englander who contends that Central Banks are going to start to dump dollars in the weeks ahead. He believes that QEE2 will prompt central banks to diversify out of dollars since the flood of newly printed dollars will only serve to create a further imbalance of dollars in central bank portfolios. Of course this assumes that these countries don’t follow China’s lead and impose their own capital controls. Either way it looks to me that “B52 Ben” will get his inflation wish and the world will do his bidding to devalue the dollar. If there is no catalyst we will see an orderly decline in the dollar; who knows maybe “Turbo Timmy”, who has been remarkably quiet since his “Bitch Slapping” from the last G20 meeting is out selling a coordinated effort to devalue the Dollar. It is also possible that neither “Turbo Timmy” or “B52 Ben” have even thought about it and we are in for an uncoordinated steep drop due to a wave of dumping, regardless the message is the Dollar is going lower even with a small rally here and there.

Our closet neighbor joined in the fray to defend “B52 Ben” and the dollar while rejecting Zollenick’s idea of introducing precious metals back in to the currency mix. The Canadian Central Banker Mark Carney sides with “B52 Ben’s” decision and goes on to praise it in an article that appears on canoe.ca website’s money section. He states unequivocally that “Our view is that gold has no monetary role to play in the international monetary system”. The article then goes on to make the point that Carney said, “it would be up to the private sector to impose market discipline on banks…Ultimately the private sector will remain the first line of defense”. Mr. Carney appears to be a very confused banker and does not truly grasp what is happening as he appears to believe that we can just slap a new coat of paint on the banking system and return to the bye gone days of yesteryear. Newsflash… Mr. Carney the private sector is trying to impose discipline and ring the alarm bell as they continue to discover and move in to tangible assets outside the banking system; so you the oher “smartest guys in banking” can delude yourselves but the masses are starting to speak and they are voting with their feet.

So with these news items out there in the public sphere you would think that Gold and particularly silver would still be moving up knowing that the Dollar is toast over the longer term. It would appear that the “Metal Boys” aka bullion banks were at a point of screaming uncle and their losses especially in Silver must have been getting pretty large even for them. Silver has been on a tear and was up about 60% year to date while there are incredible short positions held by a tiny handful of players, connected players mind you. It is just coincidence I am sure that we get the headline in the Wall Street Journal “Precious Metals Watch: Can You Say Margin Calls’?” At the same time that the CFTC has been telegraphing to the Bullion banks that it is going to supposedly do something about the unfair trade practices by the bullion banks and their excessive shorts the silver price goes in to overdrive; most likely because of a combination of QE2 and the CFTC announcement emboldening buying on the long side. The “Metal Boys” have been taking it on the chin and the COT (commitment of traders) reports have shown some declines in short positions and no new net increases indicating a belief that metal prices were not going to correct yet. I believe that the same “Metal boys” went to the CME and convinced them to up the carrying costs by raising the margin requirements 30% in one shot. Raising the margin requirements is something that occurs to slowdown a bull market especially when the big boys cry foul because the market is over running their rigging the game. Changing the rules of the game can have a short term negative effect, but a move like this will ultimately make the bull stronger because the more it costs to carry it will contain some of the MOMO(momentum money) and keep the metal in “strong” hands. It will be interesting to see in the current COT report if the “Metal Boys” were able to cover to slow down the hemorrhaging and get out of the freight trains path.

So as you can see dear reader there are telltale signs buried in the chaos that are sign posts to lead us to whatever the new order will be. Just for the record I am not talking about the conspiracy theory “new world order” as perpetrated by the Bilderburgs and Tri-lateral commission, but instead an economic new order that we have brought upon ourselves with lack of foresight and poor policies. Reading the tea leaves is a tough task but it is the only way to see what the future may hold. If you can piece together the information you can profit and thrive. To do this is kind of conjecture for investing is to try to do what the “great one” Gretzky said about why he was so successful in hockey. Gretzky said “I don’t skate to where the puck is but where the puck will be”. I hope that all of us are skating to where the puck will be, until tomorrow I return to the “cone of silence” to try and make order out of chaos.