Vigilant Investor

If Tyranny and Oppression come to this land, it will be in the guise of fighting a foreign enemy.
~James Madison

The urge to save humanity is almost always a false front for the urge to rule.
~H.L. Mencken

The welfare of the people in particular has always been the alibi of tyrants.
~Albert Camus

It is a universal truth that the loss of liberty at home is to be charged to the provisions against danger, real or pretended, from abroad.
~James Madison

If you live long enough, you’ll see that every victory turns into a defeat.
~Simone de Beauvoir

How far can you go without destroying from within what you are trying to defend from without?
~Dwight D. Eisenhower

Those are all valid quotes.

Yet, if brought up regarding the recent revelations that Bush’s security apparatus is monitoring private money transactions on a global scale in its war against terror, each would be dismissed by supporters as irrelevant given the “obvious need” to fight terror and enemies of the U.S.

Yet one can’t help but figure that once such practices become normalized, the tools necessary for oppression of freedom are forever in the hands of a government, and therefore subject to future misuse.

We bring this up because of the likelihood of capital controls in the future of U.S. in an attempt to prop up the dollar should years and years of constant inflation (that is, in the classic definition of the word, meaning increasing the money supply) finally catches up to the U.S. Whenever a financial crisis happens in a country, smart, entrepreneurial wealth seeks to protect itself however it can. When a nation’s politicians and central bankers gear up for policies that enable them to confiscate citizen’s wealth in order to play god with the economy, the result is that wealth wants to flow out of a country. Enter capital controls, which prevent the free movement of capital to where the market deems it should go..

Sound far fetched in the supposed “land of the free”? While often not talked about, but our very own St. FDR — Franklin Roosevelt was guilty of just such a scam. After the Federal Reserve managed (or, mismanaged, as the case would be) to engineer the 1920s bubble and subsequent crash and credit contraction, leading to the depression, FDR stepped in and placed severe restriction on the free movement of dollars in the U.S.A. For example, while you won’t be taught this in school, gold was made illegal to own by the common citizen. The reason? Because it presented valid competition as a safe haven for wealth vs. the dollar.

FDR and his cadre of economic meddlers (Keynes, Friedman, et al) had it in their minds that they would not only partially default on the dollar, but that they would expand the money supply vastly in order to bail out the economy. By printing dollars out of thin air, they would be used to buy FDR’s New Deal projects. But we used to learn in economics 101 that wealth gained by printing money comes at the expense of those already storing their wealth in the currency. What the new money gains the old money loses. Not being stupid, the more entrepreneurial citizens holding the wealth would soon enough be selling dollars for something that couldn’t be counterfeited, and FDR’s dollar would have dropped substantially as people exchanged dollars for the only currency to have lasted thousands of years: gold.

That said, in this modern age, should we end up in a financial crisis that would require the Federal Reserve to work with the U.S. Treasury to inflate the dollar at an even faster pace than it is currently, one could expect people to exchange their dollars fairly quickly for alternatives. In the face of authoritarian laws like those from FDR, many would still choose to exercise true freedom in an attempt to move their money offshore. Enter all the lessons Big Brother learned in tracking offshore money movements thanks to the War on Terror.

This may sound as if it is an unlikely circumstance to ever unfold, but tipping points historically hit fast and unexpected. And, as regular readers of Vigilant Investor know, the U.S. economy and Federal Government face enough structural headwinds where scenarios of the dollar losing its status as the world’s reserve currency need to be weighed.

“I don’t have to worry about inflation because Ben and his partners are doing that right now for us and I think will be successful in controlling it.”

– Edward Lazear, Chairman of the White House Council of Economic Advisers before the Joint Economic Committee of Congress


We really don’t know where to start with that one.

It’s certainly symptomatic of the combined gross misrepresentation of what inflation is by the “experts” – along with the complete misunderstanding of what it is by the public. If folks understood the basics — they would laugh and be outraged at the same time upon hearing such a comment. The reasons Congressmen do not react in such a manner are far more worrisome.

Look everybody – you really need to understand the basics — so let’s start with them.

Webster’s 2006 definition of inflation is:

“An increase in the volume of money and credit relative to available goods and services resulting in a continuing rise in the general price level”

Webster’s 1913 definition equivocates far less – getting right to the point:

“Undue expansion or increase, from overissue; — said of currency. [U.S.]”

The most important thing to note here – is that inflation today is being defined by it’s symptom (rising prices) – and not what it really is – the expansion/over issue of the Dollar and credit. This is important – because to define inflation by it’s symptom (rising prices) is as inaccurate as defining drunkenness as by it’s primary symptom – stumbling! (“What’s wrong with him?” “Oh, it looks like he’s got the stumbles).” Folks – it’s ridiculous, and it’s been happening right in front of your eyes!

Again – inflation is the expansion/over issue of the Dollar and credit. Prices simply rise because the ever-increasing supply of money continues to drive the overall purchasing power of the Dollar down.

So when a senior economic advisor to the president states that “Ben and his partners” are controlling inflation while the chart below indicates the continually exploding money supply…

Causing the Dollar’s value to plummet as seen here….

…How in the world can a rational, informed person believe him?

We don’t.

We’ve long been arguing the Austrian School of Economics perspective about inflation being tied to money supply, a sentiment echoed by Milton Friedman and the monetarist school. Unfortunately, through the Greenspan years, because the vast increases of money aggregates vented into financial assets instead of consumer prices, analysts and common investor alike have come to believe that inflation was conquered, and that their wise central bankers could, in fact, enable us all to have our cake and eat it too. That is, of course, because the definition of inflation — if one bothers to look back through history — is simply the increasing of the money supply, vs. the current common understanding, where “inflation” is used to describe thy consequent symptoms of such actions: rising prices. Moreover, with official stats like CPI rigged to understate the actual rate at which prices rise, a complacent professional class out to build-up Wall Street is more than happy to always be as bullish as legally possible.

Whatever the case, in the face of rising price tension, especially in energy prices, the debate and discussion is beginning to relook at the inflation debate from decades ago.

We encourage readers to give a look to the Christian Science Monitor, for example, where they give the inflation tip: watch money supply. As the world catches on, there could be large shifts in investor attitudes, and vigilant investors will be poised to benefit.

It ain’t easy, but someone’s gotta do it.

That’s the rationale, at least, when you talk to supporters about the U.S. being in the global cop business.

But being global cop is the exact opposite of what the founding fathers had in mind when they founded the nation, talking often of how it would erode liberty, run up deficits and debt - and lead to a host of unintended consequences. Instead, they suggested concepts like a very small, non centralized army (Jefferson actually thought there should be no formal army), and trade with all nations, but alliances with none.

Regarding the former, they noted that standing armies have a knack for being put to use when sitting around. History showed that when domestic troubles arose, foreign enemies were conjured up to distract and galvanize a discontent citizenry. As well, armies often were used to subdue dissent among a nation’s own people.

Regarding the latter, alliances often obligated otherwise neutral nations to wars in which the citizens had no real benefit or interest, although often it benefited the royal families, banking interests and political elites of both nations. The U.S., being a nation of the people, such was outright sacrilege. Instead, trade, it was argued, made you friends with all. The philosophy foreshadowed the (I believe it was) Bismarck observation, that when trade ceases to flow freely across borders, armies soon will.

Yet despite the intent at our liberty minded founding, here we are 225 years later running massive federal deficits, running up a gargantuan federal debt. We have troops in over 100 nations, and have assisted and organized many small wars in the last fifteen years. We have a 50+ year legacy of steering the direction of autonomous foreign nations’ governments and politicians with hundreds of $ billions of targeted aid and interventions, and consequently we have a created legacy of enemies who were opposed to and lost to those allies. Continue Reading »

With the passion the rest of the world (outside the U.S.) has for world football, it is not a surprise to learn that the results of World Cup games during the once every four year tournament affects the markets in the countries of contending teams.

As for our opinion, we congratulate Deutschland for the 3-0 group of four run, winning out earlier today 3-0 over Ecuador. Since both teams pass to the next round, neither needs to worry about a bad day for their markets — at least for a few days more!

Now, if only Team U.S.A. can manage a win over Ghana!

Venezuelan President Hugo Chavez is making a move to nationalize the nation’s idle precious metals and diamond mines. Of course, many of these fields include those awaiting permits from the government, so it is not as if all were unwanted.

This won’t bode well for those companies doing business in Venezuela, nor encourage future private investment into the increasingly collectivized economy. Already Chavez’s policies on oil are leaving the nationalized oil infrastructure failing as he sells the product below market prices in an attempt to win support. That difference in price means nothing is left over to update and upkeep the aging infrastructure.

While it may be popular for those more interested in pandering to popular socialism, such policies are a recipe for economic disaster. Yet politicians in the U.S. are pimping policies that, while not formally nationalizing the industry, would exact retribution on oil companies and consumers simply because the economic environment is demanding a higher price for oil related products. Yet the very policies of Congress - directly and indirectly - are a large cause for why the prices continue to go up. But that does not stop some in Congress from wanting to further confiscate revenue from oil related sales so that Congress can redistribute the booty to their own constituencies as a way to earn votes.

That’s not so different from Chavez, and vigilant investors are taking note.

• Fed’s Dilemma: Prices Climb as Economic Growth Slows
• Rents increase at fastest pace in 5 years
• Dollar helped by US rate view, safe haven flows
• Rise in inflation puts pressure on US rates
• IMF Sees Increased `Downside Risks’ for Global Growth
• Stocks sink on rate worries; Dow off for year
• Japan stock market takes big 1-day tumble
• Gold, silver jump on technical buying, weak dollar
• Latin American Markets Fall Again on Interest Rate Concerns
• S&P 500 Falls to 7-Month Low, Erasing 2006 Gain
• Treasuries Fall, Extending Rout
• Dollar fails to extend gains in wake of CPI data

After writing yesterday’s critique of lobbying by the corporate retirement plan industry to create more work for its members - at the expense of small businesses — I thought I’d touch on a similar example of messy government causing undue complexity, and wasteful allocations of our nation’s vast, but limited and declining resources.

Today’s example? 529 college savings plans. Regardless if you are a candidate for such a plan, I encourage you to read today’s dispatch through to its conclusion, because it illustrates perfectly a deeper, nationwide problem that is just one of the many reasons why we remain long term bearish on the U.S. economy.

On the surface ‘529 plans’ are a great idea (although it should always be kept in mind that had the government stayed out of the way in the first place, 529’s wouldn’t be necessary). Essentially, a 529 plan allows family members to contribute large amounts of money to the education of future students in a tax advantaged investment account. From a federal tax perspective, contributions are not deductible like an IRA or a 401k. However, so long as the money inside the account is used for purposes of broadly defined higher education, the money - gains and all - may be accessed tax-free to pay the related bills.

Sounds like a great, straight forward idea, right? Well, not so fast. Continue Reading »

This morning I was perusing the bi monthly journal for the American Society of Pension Professionals and Actuaries (ASPPA), and organization to which our separate Third Party Administration (TPA) firm (Ernharth & Associates, Inc.) belongs. TPA related firms essentially help U.S. employers mange the very cumbersome design, administration, and compliance regulations governing those wanting to offer employees an official company retirement plan. Let it suffice to say, constant, politically motivated rule changes since this private business issue came under the prevue of Congress with the passage of ERISA in 1974 have racked this area of the law causing all sorts of unintended consequences.

Naturally, this complexity has created an industry of professionals who help their clients manage the minefield of regulations governing such plans, and consequently a lobby formed to protect the interests of that industry in the form of ASPPA.Regular readers of Vigilant Investor know that we are not fans of unnecessary official complexity, nor of special interest groups in the financial services who claim to be helping their clients while lobbying to create more opportunities to hike the bill on those same clients. It’s a large reason why doing business in the U.S. is not what it used to be, and it has become as big a contributor to the trade deficit as wage differentials. (Of course, in the U.S., wages and wage taxes, and a host of labor regulations, are a large part of the legislative burden negatively affecting labor’s competitiveness.)

The more legislative barriers to efficiency you burden your economy with, the less ability your country has to compete. Moreover, nothing kills the entrepreneurial spirit more among your own citizens more than arbitrary hurdles such as Continue Reading »

As much as CPI is rigged to understate inflation, the recent news has the markets worrying about what we’ve been talking about for a long time: eroding purchasing power in the face of stagnating wages.

You can read more about it here:

• Consumer Prices Rise in May

Which of course leads to:

• Consumer Spending Drops Sharply in May

While the markets struggle to figure out what is going on, and what the central banks are up to regarding liquidity (increasing or decreasing?), we expect a new round of the inflation / deflation debate to kick in. However, keep in mind that even though CPI is up, the number still tends to grossly understate inflation compared to the original intent — as a static basket of goods measured from month to month.

With gold trading at $614 after nearing the mid $700’s, we thought some perspective from a well respected value investors made some sense:

“Gold competes with the Bernanke dollar, just as it did with the Greenspan dollar and just as it has with government-issued money since the invention of the printing press. The historical record is unbeatable: 1) Currencies ultimately lose their value. 2) Gold is a lousy long-term investment. 3) Yet when markets lose confidence in paper, there is nothing quite like a Krugerrand.

How confident are you? The U.S. annually consumes much more than it produces. It finances the deficit with dollars. More than $1.6 trillion has come to rest on the balance sheets of foreign central banks (as opposed, say, to the bank accounts of profit-seeking corporations). In recent months some of these central banks have signaled their intention to diversify into other currencies. Some of them have indicated they are buying gold.

The post-1971 dollar is uncollateralized. Its value is derived from the world’s faith in America as much as from the strength of the U.S. economy or the level of U.S. interest rates. Reading the newspapers, I judge that faith to be wavering.

The gold price has doubled in the past three years. But it has only just kept up with the price of lead and has badly trailed the prices of copper and zinc. Arguably, then, gold’s rise to date is not as much a reflection on U.S. monetary management as it is an echo of the commodity boom.”

Read the rest of James Grant’s “Glitter” at Forbes.com

““We should start to see a stand-off as buyers offer lower prices and homeowners refuse,” said Paul Ashworth, US analyst at consultants Capital Economics.“After a period of frustration, sellers should become more realistic about what their homes are worth.”

The pace of home sales has slowed over the past year, but not dramatically. Existing home sales have fallen by just under 6 per cent over the past year to an annualised 6.75m units in April. New home sales are down from an annualised 1.27m last April to 1.198m units this year.”

Read more at the Financial Times: US surge in unsold homes may herald cooling market

Greetings from Vacation Land — the great wet state of Maine, where a Nor’ Easter is keeping the rain fall steady and heavy.

When the chips get down, folks have historically gone to Gold. That’s why FDR, in a vain, authoritarian attempt at propping up the overly manipulated U.S. Dollar, made it illegal for citizens of The Great “Free” Republic” to protect their wealth in something that high minded central bankers and private banking interests could not manipulate out of thin air.

Hence, it should come as no surprise that Iran, hearing about threats of its assets being frozen abroad by the U.S. lead Global Cops, is moving its reserves into the metal. After all, the whole world is beginning to question the wisdom of holding the dollar as the reserve currency. And, why would Iran be interested in propping up the value of a nation that intends to enforce its own will — its regional objectives and so forth — onto Iran? Perhaps that also explains why Iran is planning on creating a new oil bourse where transactions will only be done in the Euro, upsetting the Petro-Dollar standard since the 1970s.

That’s not a judgment call. That’s just the reality of the situation. Vigilant Investors take note.

The Dow is stumbling upon fears that the Fed will continue to raise interest rates.  Commodities are also following suit to a degree.  Some think “Helicopter Ben” Bernanke is turning out to be “Inflation Hawk” Bernanke.  Don’t bet on it. 

By daylight – he’s “Dr. Bernanke.”  But night – and always – lurks the insidious “Mr. Hyde.”

Does the Fed Fear inflation?  In the sense that if the cost of goods gets expensive enough to slow down the economy sharply and dramatically – yes.  However, as we’ve mentioned before — most folks have been led to believe that inflation is simply the “cost of living going up.” Webster more accurately defines the term as, “An increase in the volume of money and credit relative to available goods and services resulting in a continuing rise in the general price level.” 
 

Based on that definition, Dr. Bernanke and the Federal Reserve are anything but “Inflation Hawks.”  As we have mentioned time and time again, the Fed has been – and still is – presiding over a record increase of the money supply.  Due to incredible amounts of un-funded Governmental obligations (social promises) coming due; irresponsible spending by Congress; and a debt driven economy –the inflation of the money supply over the next decade could reach unprecedented levels. 

Ask yourself these questions…  If Dr. Bernanke views inflation as “unwelcome” as he has stated — and really wants to control it – why has the Fed ceased publication of the M3 total money supply aggregate?  Why doesn’t the Fed attempt to decrease the volume of money and credit? 

Because — what the Fed and Mr. Hyde — really fear – is deflation – defined by Webster as – “A contraction in the volume of available money or credit that results in a general decline in prices.”  Why?  Well, what most folks don’t realize is that all the money in the US (and any other country not on a gold standard & permitting fractional reserve banking) — is based on debt!  Every single dollar.  At first, this concept can be hard to wrap your noodle around.  But when you realize that the Fed can literally create money out of thin air to buy Government Bonds; when your own bank can lend out 90% of your money – creating 9 new dollars out of every 10 on deposit; and when your bank can use those same loans as collateral to borrow more money; it becomes easier to understand! 

What’s wrong with costs going down?  What’s wrong with paying down your debt?  If all debt were paid down in our funny money system – the money supply would not just decrease – it would completely evaporate!  And, a massive fraud would be exposed in the process.
 

This is what our economy and entire monetary system is based on.  This could never happen with gold & silver as a money.  But then again, there could be no shenanigans such as deficit spending by the Government – or extremely profitable fractional reserve lending by banks.

So, the Fed — through artificial means, with an artificial currency – attempts to “balance” the economy.  A type of balancing act at the root of every economic boom and bust in history.  

This is the tightrope Dr. Bernanke and Mr. Hyde walk hand in hand, every day – dragging us along with them. 

One of the least talked about – yet most profound factors affecting the economic future of the world is the declining birth rate of developed nations.  In Japan, disconcerting news was just released from the Health Ministry that the country’s fertility rate has hit a new low of 1.25 children per woman.  Japan’s continually declining birth rate has caused the population to drop for the first time since the end of World War II.

Considering the fact that the replacement rate (resulting in 0% population growth for developed nations) is 2.1  — what is happening to the fertility rate of these countries is alarming.  The U.S. rate is 2.1 children per woman.  Germany — 1.39.  France — 1.84.  U.K – 1.66.   Spain — 1.28.  Italy – 1.28.  Sweden – 1.66.   Norway – 1.78.  Finland – 1.73.  Russia – 1.28, etc. 

In most of Europe, populations are declining.  In the US, the population is currently remaining stable due to the fact that there are a disproportionately large number of women of childbearing age relative to older people.  So, for the time being the death rate continues to be relatively low – allowing the lower birth rate to produce enough children to offset population loss.  As the Boomer driven aging population increases – women of childbearing age will grow older and be replaced by a smaller population.   Most likely, the birth rate will then be unable to keep up with an ever-increasing death rate.  Europe and Japan are prime examples of this phenomenon.

Declining birth rates profoundly effect overall economic activity, since it has been proven that an aging population spends less.   

As importantly, developed nations with declining birth rates are also those offering the largest social benefits to their citizens.  And – as we know, social benefits offered by welfare states are primarily funded via deficit spending.  At best – a situation occurs where this year’s taxes (largely paid by the working/younger)  — are used to buy this year’s benefits (largely utilized by the non-working/older).  At worst – a charade leading to disaster. 

For example – let’s consider Social Security in America.  Today there are over 3 taxpayers per retiree.  (50 years ago – there were about 16 taxpayers per retiree).  With a massive amount of Baby Boomers heading towards retirement – and a declining amount of working Americans – there are projected to be less than 3 workers per retiree in 2018 – when the program will begin running a deficit (i.e. less Social Security taxes collected than benefits paid). 

To ostensibly combat this actuarial inevitability — in the 1980’s Congress raised the Social Security tax to a level significantly higher than that needed to pay current benefits — with the extra proceeds supposedly going into the “Trust Fund.”   These extra proceeds are supposed to make up for the shortfall projected to begin around 2018.

If you are thinking that this sounds far too responsible for Congress – you are right!  Here’s the rub.  Federal Law enacted way back in 1939 requires Social Security to invest its surplus assets in Treasury Bonds.  Yes – the government is conveniently required to lend the money to…itself!  (Congress knew this all along)!  These proceeds are then immediately spent on other programs when the budget is in deficit – and used to pay down the debt when the budget is in surplus.  They are not set aside for Social Security benefits to retirees!  When 2018 rolls around – and it’s time to cash in the Bonds – the Government won’t have the money set aside to pay them off – and to provide the funds for the Social Security shortfall.

Does this really surprise you?

So, demographically speaking – with all social benefits in reality paid only by current taxes – and lower birth rates resulting in a greater burden on a smaller taxpayer base — there are but few options.

Women can have more babies.  Yet, decreasing birth rates are the norm as a country’s population becomes more educated.

Immigration policies can change.  Regardless of political demagoguery – we would not be surprised to see large numbers of immigrants granted amnesty/citizenship over the next decade to help increase the number of younger taxpayers in the United States.  Yet this has met with great outcry from the populace, unions, and media.

In the end, there is only one politically expedient way to pay for the impending shortfall in social benefits…Printing money.  The massive inflating of the money supply – and the continued degradation of the US Dollar by its own Government. 

We believe the Dollar’s decline relative to its present value over the next decade or two is inevitable – and could be unprecedented.  A similar fate likely awaits the currencies of most developed nations.  While everyone else focuses on the Dollar’s value relative to money printed by countries who have committed the same gross mistakes as the US — we prefer to focus on the mega trend.  The fate of all paper.