Vigilant Investor

It didn’t take long for Congress to make an emphatic point that it does not understand the value of a free market, or for that matter, that it fails to comprehend the importance of a freely operating pricing mechanism. Said another way, Congress is proving its members to be the economic jackasses they’ve generally always tended to be.  In this case, some are attempting to disrupt the free flow of dollars into commodities — the same dollars whose supply were expanded at a decent clip over the last few decades.

The attempt at preventing the market place from determining the real price of commodities as dollars flood  from other, bloated priced items — real estate and related securities, financial equities, and less attractive, low interest rate debt — and into real, hard, tangible assets that are forced to be backed by labor and sacrifice as opposed the Wall Street alchemy, Ponzi finance, and the money printing press.  Robert Mugabe’s inflation in Zimbabwe clearly is far more dramatic abuse of a currency, but his policies to hide inflation are fundamentally no different.  He attempts to prevent price discovery as well, and the consequences he has will be what the U.S. can expect — earlier stages, of course, but dramatic nonetheless:  capital shifting to where it can find a true price vs. being hampered by centralized cover-up.

Yesterday Bloomberg began reporting that the Chairman of the Senate oversight committee, Joseph Lieberman, is considering legislation limiting what he defines as speculation in the commodities markets. While it is geared at preventing mostly larger players — hedge funds, and other institutional investors — from hedging in the commodities market, the effects of this proposal, should it be enacted, will cause shudders all the way down to the average person.

Mind you, we’ve been pointing out since the early part of this decade that Greenspan’s attempts at warding off the market crash and ensuing recession of 2001 would create severe dislocations in the economy as prices bubbled into new bubbles and economic activity would be distorted as the all elements of the economy restructured itself around what it perceived to be legitimate economic growth. Yet we were clear that this activity would serve only as a head-fake to the economy given it was rooted not in genuine growth, but rather through credit and monetary inflation — a process that rips wealth from the organic / functioning sections of the economy, reallocating it to the hot money, synthetic areas of the economy that can’t stand on their own absent the artificially created life support. With the collapse of the housing and credit markets, we’ve been proven about as correct as one can be — especially when compared to the supposedly reliable experts on Wall Street, at the Fed, and in Washington D.C. who were overwhelmingly blindsided by the collapse.

Says Lieberman:

“We may need to limit the opportunity people have to maximize their profits because a lot of the rest of us are paying through the nose, including some who can’t afford it.”

Meanwhile, Senator Claire McCaskill, Democrat of Missouri, is warning that the people are ready to reach for the Pitchforks. Well, let’s make sure they know who the real culprits are.  In short summary, here’s a few key reason why commodities are going up:

• Too much money has been printed over the last few decades. The consequences of this were beneficial as they often are when the government and its sanctioned central banks (ala our Federal Reserve) inflate in the early stages in that some “nice” assets were inflated in price, such as stocks and bonds, and houses. Only, investors failed to make the connection that these bubbles, with bonds still in high gear, were inflationary.
• The other benefit was a double edged sword: free trade.  While many lost there older, higher paying jobs in the United States, most Americans were only mildly inconvenienced as newly minted dollars were quickly vented off shore with the trade deficit.  All that wealth was invested by foreigners into vastly expanding low cost production capacity, and hence, the U.S. consumer benefitted as prices plummeted.  Were these dollars stuck in the United States, its high cost labor and cumbersome regulatory nonsense would have combined with the natural consequence of an increasing money supply facing a supply of goods and services growing at a dramatically slower pace.  Inflation would have strangled the economy pretty quickly.
• All this foreign production and accumulation of wealth requires commodities to feed it. That demand is competing with the U.S. as supply has not increased so drmatically. Flush with U.S. dollars, trade partners are ever more willing to part with dollars to satiate their demand for commodities.
• All those dollars are printed, and they exist in the economies of many countries across the globe. Most still remain invested in the Bond bubble, focusing heavily in the perceived safety of U.S. Treasuries. However, other U.S. bond assets, especially the once sturdy mortgage sector has imploded.   This, as commodities were gaining pretty much since 2002.  Since then, Sovereign State and Central Bank investors have been contemplating the problems of the dollar, and have begun braodening their positioning of new dollars in areas other than just bonds and equities.  Hello, commodities as an asset class.
• More private and institutional Investors have been looking to diversify as well, with the most savvy having understood the nature of the inflation that took  place over the last twenty years and its contribution to a vast credit bubble that will require yet more inflation to support Wall Street investment banks. They’ve also noticed the U.S. government has a long term insolvency problem given politicians have promised the sun, moon, and stars at such a level that it will literally bankrupt the nation, and with that they expect politicians to to the politically surreptitious method of paying off things like Social Security, Medicare and Medicaid.  They’ll do it with freshly printed dollars vs. doubling taxes and cutting benefits by a third.  These savvy investors have diversified into commodities as a basic inflation hedge given they believe the die were long ago cast.
• Other savvy investors expect foreign sovereigns to lose their appetite for U.S. debt at near 50 year low yields given they expect the emerging recession will be severe.  This will result in more commodity hedging / dumping of the dollar, they expect.   F
• or decades we exported our inflation, and foreign nations gladly imported it for trade purposes. Now we will pay for it as foreigners slowly export it back to us.
• Finally, Peak Oil theory has been right on, and this problem of decreasing light sweed crude supply means oil producers will be forced to retrieve harder to get and less easily refined resources vs. what so easily flowed for the past sixty years.  The quality of Saudi oil has been steadily decreasing suggesting that the Saudis are not so flush as in the past, further explaining their recent shift to preserve their resource for future generations of their own people (a trend emergin among all OPEC nations) vs. supplying the United States, which refuses to develop its own resources while it’s politicians, delusional as always, wag their fingers at the OPEC for not producing enough.
• U.S. energy policy has been swamped by Green and NIMBY (not in my back yard) legislation that simply has caught up with the U.S. via higher priced energy.  Oil is a crucial factor in the production of everything, including fertilizer, transportation, and every single facet of production. As it goes up in price, invariably so will all else.  Nuclear energy has been virtually outlawed while many nations globally use it very safely.  Meanwhile, alternative energy has been a goal, but its still not viable technology.  NIMBY and environmental legislation hammers some of it, such as wind farms, which have been prohibited for killing some birds and making unsightly beach views.
• Just in Time Delivery was dependent on low energy costs. Supply will be constrained as the economy rewires itself to slower delivery and larger inventories in order to lower costs.

So there you have it, and that’s just the tip of the iceberg. Congress can reshuffle the deck chairs and search to blame, blame, blame everyone but themselves and the private banking cartell they collude with called the Federal Reserve.  But inflation is catching up to us, and it the stupid legislation in the United States that made the U.S. too complicated for doing business, and its currency so common, well… that’s to blame.

That said, expect the politicians to distract from the real problems as they always do. They will, instead, look for politically popular scapegoats to help their re-election.

No doubt, there are quite a few problems behind why oil has jumped above $128 a barrel.  Never mind hooey arguments about greedy oil companies that resonate with the economic illiterates among the loudmouth media and the complaining voters.

While we don’t have much good to say about any politician on the matter of energy, we really can’t disagree with President Bush’s observations about pressuring the Saudi’s for more output:

“Our problem in America gets solved when we aggressively go for domestic exploration. Our problem in America gets solved if we expand our refining capacity, promote nuclear energy and continue our strategy for the advancing of alternative energies as well as conservation,” he said.

“One interesting thing about American politics these days is those who are screaming the loudest for increased production from Saudi Arabia are the very same people who are fighting the fiercest against domestic exploration, against the development of nuclear power and against expanding refining capacity.”

This, said Bush, after noting that Saudi output really is not the ultimate solution to the U.S. price problem.  Mind you, many in the U.S. Congress are wagging their fingers at the Saudis — like candidate Hillary Clinton — for not increasing their production significantly enough to alleviate U.S. price pressures, as if the world should rotate around the U.S. dilemma.  The same folks giving grief to the Saudis are the same ones who refuse to allow the U.S. to develop its own energy resources as Bush notes above.

Not that the Republicans have been any great movement as of late to get anything done themselves, with R candidate John McCaine having been a pivotal vote in the Senate preventing the development of Alaskan reserves.  Indeed, the U.S. has not built a new refinery in three decades, and refuses to allow development of both oil and clean burning coal, not to mention nuclear reactors.  Even environmentalists are preventing air windmills, much to the happiness of those with fancy homes on the coasts who loath having their million dollar views ruined by windmill farms harvesting the constant ocean breezes.

Hypocrisy aside, we’re not hearing one of the core causes for skyrocketing energy costs: plain old fashioned inflation. And by “inflation”, we don’t mean the modern misuse of the word to describe the consequences of inflation — rising prices –, but rather the actual cause of the rising prices: climbing money supply.   The world is now awash with dollars thanks to a steady thirty years of the Fed and the U.S. banking system creating dollar after dollar with its fractional reserve, fiat privilege.

Looking at the money supply graph, you can see that the various measures of U.S. dollars have been on a steady rise since the 1980s, and especially ramped up in the 1990s.   Most were lulled to sleep about the ugly effects of inflation due to two factors, both of which served as siren songs for the unsuspecting public and the herd of sheep hitting their record bonuses on Wall Street:

1. Inflating nice asset prices like stocks, bonds, and houses
2. Exported inflation dollars bought cheap goods made abroad, a honeymoon that lasted until the last few years, when foreign nations were flush to the gills with dollars and ready to part with them to buy things that were not so easily printed and common — and very essential, like energy!

“The Federal Reserve as other central banks is obviously taking onto its balance sheet a lot of mortgages these days.” “Well, the creators of the Federal Reserve system would be rolling over in their graves if they knew the Federal Reserve is buying mortgages.”
– Former Federal Reserve Chariman Paul Volcker

Whether or not the creators of the Fed would be rolling over in their graves is debatable in our opinion. Like Andrew Jackson — we believe central bankers have always been dangerous, incompetent meddlers. We feel the Fed should never have been created — and and that it continues to prove itself as bungling as any other central planning committee. But we digress…. That said, the former chairman’s grave concern over the central bank taking on billions of not so hot private debt is quite valid.

Volcker went on to warn that recent intervention by the Fed in securities markets might compromise it’s independence. He went on to say that the Fed’s inability to contain inflation will create a 1970’s like scenario. Again, he’s right there. We’ll also add, it’s too late Paul — the nationalization of the US private debt has begun. When politicians, who’s outlook is only as far as the next election — get involved, the trend will only accelerate. So to will corresponding inflation and Dollar degradation.

Beyond the blatant example of the Fed’s $30 Billion bailout of Bear Stearns — we now see Senator Christopher Dodd proposing the creation of an FHA program to insure refinanced mortgages following partial forgiveness of the loans by lenders. OK, let’s think about this. In an environment where U.S. foreclosures have risen 65% over the past year — and private banks/lenders are preferring to seize homes rather than renegotiate with already defaulting borrowers — the Federal Government is going to step in with money it does not have (but will be all to happy to print) — to back already bad debt.

Also, earlier this month, the Fed agreed to accept securities backed by student loans pledged as collateral for Treasuries the central bank would in turn lend to Wall Street Investment Banks. Let’s analyze that deal. Investors had become far less willing to finance student loan debt at pre-existing prices — due to liquidity issues, the economy, and the fact that consumers (including students) are hurting — and are therefore higher credit risks. The cost to finance such loans would have to naturally go up. Wall Street investment banks (you know, the ones who paid themselves billions in record bonuses over the past year) were less willing to hold onto securities they owned backed by this type of debt. However, if they tried to sell it — they would sell it for a loss. No worry, the Fed would lend/swap them Treasuries for the riskier (and worth far less) student loan backed securities.

Effectively, you have the government, or quasi government institutions backing substandard debt with money it will have to print. That spells one thing — accelerating inflation — and the always accompanying confiscation of private savings. And we’re not talking the low single digit inflation figure the government “calculates” (and bases Social Security payment increases on). We’re talking about the inflation you see in the supermarket ($4 for a handful of blueberries anybody?) — and at the gas pump.

When we hear the Treasury Secretary, or the Chairman of the Fed talk tough on inflation and defending the Dollar — we just smile. When we hear political candidates blaming oil companies and “speculators” for rising prices — we smile again.

We think the next 3-5 years will be quite interesting.

“I think we were really on the verge of a financial collapse of unbelievable proportions that we haven’t seen since the 1930’s.”
– Former U.S. Treasury Secretary Paul O’Neill describing the Bear Stearns bailout in an April 16, 2008 interview on Bloomberg

Read that quote again by Paul O’Neill – because, yep folks, that’s really where things stand. Our financial system effectively patched together by an inflationary, money printing band-aid. And, as the real estate markets in England, along with those in Spain, Ireland, et al. continue to melt down, we maintain our belief that the whole fiasco is far from over. (Our regular readers know we said the same when conventional pundits said the worst was over in 2007).

The interesting thing about economics is that people have been conditioned to believe in the charade that it is a mysterious, complex, science – and to be successful at understanding it, explaining it to the great unwashed, and at running large portfolios – one must be a superior mathematician educated at the most prestigious of universities. As we watch the same geniuses educated at said universities – some of whom had supposedly developed mathematical models which had eradicated risk – continue to drive hedge funds (and at least one major Wall Street brokerage firm) valued in the $ billions straight over the cliff – we say – “oh really?”

We instead choose to take Harry Truman’s quote — “There is nothing new in the world but the history you do not know” – to heart when we look at economics. History is in fact the study of human behavior – of what has worked, and what has failed. To ignore historical facts one must be either arrogant, a fool – or an arrogant fool. So, as Sir Alan Greenspan and his knights at the Fed Round Table repeatedly cut rates earlier this decade – we warned that the unfolding scenario looked a whole lot like Japan in the 1980’s and 90’s! A Stock market bubble, followed by a stock market crash – and subsequent economic pain. Then came massive interest rate cuts to supposedly “stimulate” – which instead caused a real estate bubble – followed by a real estate collapse, and a severe, prolonged recession.

Sound familiar?

What next? We see the bailouts continuing — simply because the alternative is the severe and necessary corrective pain to clean out the mess and get prices of all things back in line. And what politician, Wall Street banker, investor, or voter wants to deal with that reality? And bailouts spell inflation. Not the fudged low-ball inflation that’s used to calculate Social Security payment increases or “official” economic growth. We’re talking about real inflation. The rapidly rising kind you are seeing at the supermarket and the gas pump on a daily basis. As these inflationary bailouts continue – look for prices of all things tangible to increase dramatically.

Commodities bubble? We think not – because bubbles require excessive stockpiles/inventory/supply – and we don’t see that at all – in anything. And we see inflationary (money printing/bailout) policies accelerating.

Oil at $125 in the near future anyone? $5 Dollar gas at the end of the year? Food prices continuing through the roof? It would not surprise us at all.

Rogers speaks the truth. Recall, Rogers was the original thinker behind the Quantum Fund (which made George Soros) back in the 1970s. He was right then, and he’s right now. Of course, he’ll be ignored and the free market will continue to get blamed for the problems created by the price fixers and central planners, and the latter group will promise more solutions to those problems that will only make the situation worse.

How do you navigate this situation? Why, with vigilance and proper planning, of course! Think it through.

Regulators “are playing with fire,” said Allan Meltzer, a Fed historian and economics professor at Carnegie Mellon University in Pittsburgh. “With good luck, none of these liabilities will come due. We can’t expect that good luck, and we haven’t had it.”
– Bloomberg (March 26, 2008)

The reason you want solid collateral to secure a loan is obvious. You want to protect adequately against the borrower’s potential inability to pay you the loan back. How interesting that the Fed is taking 30 $ Billion of illiquid mortgage securities as collateral from otherwise insolvent Bear Stearns to bail the Wall Street firm out. As intriguing (alarming) — is the Treasury’s encouragement of Fannie Mae and Freddie Mac to buy more mortgage-backed bonds.

We ask — who in their right mind would lend out their own money backed by such risky collateral? Who today would buy mortgage backed bonds with their own money?

Ah, there lies the rub! It’s not their money which backs these shenanigans – it yours!

We’ve continually warned about the bailout addicted U.S. Another voice of clarity and reason all along has been Bill Fleckenstein. As usual, he nails it in his latest commentary, “Catering to the Bailout Nation.” BTW, Bill’s recently released book Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve – is definitely worth a read! We wonder — has anyone ever been un-knighted? Can they do that?

Any reasonable person knows that bailouts beget more (and larger) bailouts. Like a drunk having another drink, it’s just going to make the hangover (and resulting inflation) even worse.

Also, ask yourself this one – why are big Wall Street banks getting bailed out (with taxpayer money) – when the 5 largest recently paid themselves 39 $Billion in bonuses?

Think long and hard about the answer to that one – because you are paying for it – in overt taxes, and the great hidden tax – accelerating real inflation.

With today’s 75 basis point rate cut – we see continued evidence as to whom the Fed really serves. As we have long said, it’s not you and I – it’s the Big Wall Street Banks. The “Big Rip-Off” of your savings continues. Jon Markman gets right down to it…

This is a nice video of Jim Rogers in unflattering terms describing the current official efforts to fix the price of money and other commodities. As for Bernanke? Hehehe.

Dr. Marc Faber was on BloombergTV again today.   He’s always worth a listen.  He’s been pretty accurate in his calls for a credit crisis over the last few years.

We couldn’t agree more with his observation that the U.S. economic policy makers have misdirected the economy towards consumption instead of capital formation and savings.  As such, they’ve enabled terrible dislocations that are exposed as unsustainable / liable to collapse absent constant easy money.   Of course, the latter has its consequences as well, considering what’s been going on with real price increases (never mind the virtually useless CPI figures…).

In today’s New York Times, Ben Stein writes an article pointing out that Goldman Sachs has sold $ billions in Collateralized Mortgage Obligations (C.M.O.’s) — including during a period where current Treasury Secretary Hank Paulson led the firm. In his piece, Mr. Stein also mentions that while Goldman was selling C.M.O.’s – it was also shorting them through index sales.

We don’t agree with Mr. Stein’s belief that the Fed will be able to save the lending day with injections of liquidity – because (among other reasons) we believe the resulting inflation will be painful and destructive. Also, after raising the “Spock Eyebrow” over the nexus between Treasury and one major investment bank – perhaps he should cast the same discerning gaze towards the Fed and it’s true loyalties.

That said, his article certainly poses quite interesting and intelligent questions — which should make any rational person think long and hard. An interesting read, indeed!

Citigroup Inc., the biggest U.S. bank by assets, will receive a $7.5 billion cash infusion from Abu Dhabi to replenish capital after record mortgage losses wiped out almost half its market value.

$ 7.5 billion is what the Sovereign Wealth fund of Abu Dhabi is going to send to Citigroup to help it shore up its balance sheet. But $7.5 billion ain’t enough. The problem plaguing so much of the credit market is far too deep. That’s because capital ratios are a requirement when it comes to banking.

For a simple example, consider the required capital to asset ratio is 1 to 10, so if Citigroup has to take an $11 billion charge / write down as they’ve announced they will for the 4th quarter, they have to jettison $110 billion of assets. Keep in mind that Citigroup has the single highest exposure — $50 billion — to high loan to value mortgages (LTVs), which are very risky for default given we’re talking a pool of 90% + loan-to-mortgage value amid the current imploding housing environment that’s feeling the pain of adjustable rate and interest only mortgages on declining property values. There are also rumors that Citi is going to have to cut as many as 45,000 jobs to stem the bleeding, which itself will require further charges!

Continue Reading »

PNC just completed its annual “Twelve Days of Christmas” cost-analysis, and it looks like lower and middle-income labor will find it harder than ever to afford even snippets of the extravaganza described in the song.

PNC found the overall cost to run the 12-day-long shebang described in the famous Christmas song is up 4%, to $78,100. Rebekah McCahan over at PNC actually solicits real quotes on fixed quantities mentioned in the song, and uses what she finds to compose PNC’s Christmas Price Index — something she’s been doing so since 1986. (PNC started this act in 1984 when $61,319 could get it done.)

What can we learn from the figures? No doubt, wage leverage at the moment is tough in the United States.  With the exception of “Eight Maids-a-milking” who’ve benefited by the minimum wage increase, up 13.6%, labor in the service sector portion of the song is clearly lagging commodity inflation.  Add to that the contraction of easy credit this past year, it would seem that the “True Love” in the song (e.g. , “On the first day of Christmas my true love gave to me…”) now more than any time recently is among the moneyed-class given the cash required to keep up with the climbing costs!

Continue Reading »

This does not come as a surprise. Rogers (who made his fame as a founding partner with George Soros in the famous Quantum Fund ) has been with us on his expectations of a housing collapse, a credit crisis in the U.S., and the dropping dollar (just to name a few). Now he’s planning on jettisoning his dollar holdings as quickly as practical. Pay attention to the discussion on Ben Bernanke’s recent comments about spending dollars in the U.S. and how the dropping dollar won’t affect U.S. consumers.

Ouch!

DISCLAIMER: Our site posts this clip not to make a statement on investing one way or the other. It is a posted purely for the discussion of the dollar related to broader U.S. and Global economic trends. Please read our disclaimer for further information.

You know everyone is thinking it – so there, we asked it!

In an era where the world’s most famous supermodel insists on being paid in Euros (not Dollars), and rap stars flash Euros vs. Greenbacks – it’s a logical question. Especially when you consider that Gold/Silver backs NO government currency on the planet, and that as the U.S. continues to export inflation by printing/degrading the Dollar – foreign nations will follow suit to protect their exports, etc. In other words – ALL paper money is becoming more worthless by the day.

As OPEC nations meet, they discuss among other things, skyrocketing production costs. We also learn sentiment exists that OPEC has lost the ability to lower prices by increasing output. How can this be? Sure, demand has increased dramatically over the decade. However, we think the primary reason is that prices have a long way to go to accurately reflect the massive (and continuing) increase in the global money supply. In other words “real inflation” – not the bogus, rigged figures central bankers use.

Hey, say what you will – rap stars and supermodels are up on the latest trends. As soon as they catch on – they just won’t be wearing their bling – they’ll be getting paid in it. Either that, or they’ll be converting whatever “paper” they are getting paid in as fast as they can into Gold and Silver. It doesn’t take a genius to figure out what widespread behavior like that will do to the price of the precious metals.

As always – opportunity knocks!