Sunday, April 17, 2011

Try For Free Our Galaxy Combined Portfolio Systems +23.36% In 2011

Nella sottostante tabella sono raffigurate le equity line mensili dei trading systems che compongono il nostro portfolio systems Galaxy ed il riassunto MTM dell’operativit√† dal Novembre 2009. Galaxy chiude con un ottimo risultato anche il mese di Marzo, dopo un equivalente risultato nel mese di Gennaio e Febbraio, portando a 23.36 % la performance del 2011. Inoltre, nel mese di Aprile sta guadagnando il 6.00 % c.a. Quello appena chiuso √® il sesto risultato utile consecutivo a livello mensile dopo la breve pausa alla fine dell’estate dello scorso anno. L’equity continua a svilupparsi in maniera armonica mantenendo un’inclinazione positiva e costante grazie all’elevata diversificazione all’interno del portfolio. I risultati storici di Galaxy Portfolio System sono disponibili ai seguenti link: http://www.box.net/shared/static/nz7u0ztnbp.xls, http://box.net/shared/b9cg6kfa6s. I risultati dei singoli trading systems sono a disposizione al seguente link: http://www.box.net/shared/5vajnzc4cp.

Richiedi la demo gratuita di 30 giorni di Galaxy Combined Portfolio Systems

In the table below you can see the monthly equity line of the trading systems that make our Galaxy portfolio systems and the MTM performance summary since November 2009. Galaxy ends with a good result also the month of March, after a similar result in the month of January and February, bringing the performance to 23.36 % in 2011. Moreover, in the month of April is gaining 6.00 % c.a.. One just closed is the sixth consecutive positive months after the brief pause at the end of the summer last year. The equity continues to grow in harmony while maintaining an upward slope and steady thanks to high diversification within the portfolio. Historical results of Galaxy Combined Portfolio System are available at the following links: http://www.box.net/shared/static/nz7u0ztnbp.xls, http://box.net/shared/b9cg6kfa6s. Historical results of single trading systems are available at the following link: http://www.box.net/shared/5vajnzc4cp.

Request a free demo of 30 days of Galaxy Combined Porolio Systems

Galaxy-Risultati-Marzo_thumb4

Equity Line Trades, Giornaliera e Mensile di Galaxy / Trades, Daily and Monthly Galaxy Equity Line                                Free Demo Available

Galaxy-Trades_thumb Galaxy-Time_thumb Galaxy-Mensile_thumb Galaxy Demo

Performance MTM Mensile di Galaxy Portfolio System con un capitale iniziale di $ 200.000
Monthly MTM Performance of Galaxy Combined Portfolio System with $ 200K initial capital

Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
2009
1.19 %
2.90 %
2010
(4.28 %)
24.49 %
2.99 %
1.76 %
15.62 %
4.35 %
10.60 %
(0.41 %)
(4.73 %)
1.75 %
12.80 %
1.50 %
2011
7.54 %
7.75 %
8.06 %
 


Material in this post does not constitute investment advice or a recommendation and do not constitute solicitation to public savings. Operate with any financial instrument is safe, even higher if working on derivatives. Be sure to operate only with capital that you can lose. Past performance of the methods described on this blog do not constitute any guarantee for future earnings. The reader should be held responsible for the risks of their investments and for making use of the information contained in the pages of this blog. Trading Weeks should not be considered in any way responsible for any financial losses suffered by the user of the information contained on this blog.

U.S. Slip-sliding into Recession


In June, the Fed's bond buying binge (QE2) will end and the economy will have to muddle through on its own. And, that's going to be tough-sledding, because QE2 provided a $600 billion drip-feed to ailing markets which helped to lift the S&P 500 12% from the time the program kicked off in November 2010. Absent the additional monetary easing, the big banks and brokerages will have to rely on low interest rates alone while facing a chilly investment climate where belt-tightening and hairshirts are all-the-rage and where consumers are still licking their wounds from the Great Recession. None of this bodes well for the markets or for the millions of jobless workers who continue to fall off the unemployment rolls only to find that the social safety net has been sold to pay off the mushrooming budget deficits.

So, what are the odds that the economy will tumble back into recession?

First, let's look at the stock market and an article by Marketwatch's Mark Hulbert:

"There have been only four other occasions over the last century when equity valuations were as high as they are now, according to a variant of the price-earnings ratio that has a wide following in academic circles. 

Stocks on each of those four occasions would soon suffer big declines....

The four previous occasions over the last 100 years that saw the CAPE as high as they are now:

The late 1920s, right before the 1929 stock market crash

The mid-1960s, prior to the 16-year period in which the Dow went nowhere in nominal terms and was decimated in inflation-adjusted terms

The late 1990s, just prior to the popping of the internet bubble

The period leading up to the October 2007 stock market high, just prior to the Great Recession and associated credit crunch

To be sure, a conclusion based on a sample containing just four events cannot be conclusive from a statistical point of view. Still, it will be hard to argue that the current stock market is undervalued or even fairly valued...." ("History bodes ill for stock market," Mark Hulbert, Marketwatch)

Well, that doesn't sound too good, does it? The markets appear to be at a tipping point while consumers are still deleveraging to get out of the red. But at least another credit expansion is underway, right? Isn't that what Bernanke just said two weeks ago? That's should keep the economic-flywheel spinning-along until consumer demand picks up, right?

Ahhh, if it was only true. But, it's not. There is no credit expansion; it's just more public relations fluff like "green shoots" and "self sustaining recovery". Here's a blurp from Gluskin Sheff's chief economist David Rosenberg who breaks down in the credit picture in plain English:

"Consider this: We know that consumer credit, ex-student loans, is still contracting. And we know from National Federation of Independent Business that "the vast majority of small businesses (93 percent) reported that all their credit needs were met or that they were not interested in borrowing."...

And this---also from The Big Picture blogsite:

"The new U.S. consumer credit numbers reflect an economy that is reaccelerating, and that is very bullish for growth - as well as inflation. All in all, U.S. household credit surged by $7.62 billion in February, ramping up faster than at any other time since June 2008.

I respectfully beg to differ. While the story gives a passing nod to the rise in student loans, the fact of the matter is that student loans are virtually the whole story, and the downward trend/trajectory in credit, save that category, has really not reversed." ("Fade the Consumer Credit Headline", The Big Picture)

Sure, student loans and subprime auto loans have been surging, but that's mainly due to crafty sales-hype and government subsidies rather than real organic demand. The truth is, consumers are still hunkered down and adding to their savings. They're shunning additional debt regardless of low rates and other inducements. So demand is still weak and getting weaker as food and energy prices soar. And, while its true that core inflation is still hovering around 1%, headline inflation has zoomed to 0.5% in the last month alone. What does it mean? It means that the average working slob can't buy Mom that new waffle-iron because he shot the wad filling his behemoth SUV with CITCO unleaded.

It's the same for retail sales, which increased by a whopping 0.4% in March. Only, don't drill too far into the numbers or you'll find the truth, that apres gasoline, the number drops to a paltry 0.1%, hardly worth mentioning. So, times are tough for consumers and they're about to get a lot tougher as the GOP-led Congress takes its meatcleaver to the 2012 budget and the states are forced to dump payrolls and slash services to the poor and needy. It's all bad.

Is it any wonder why small business owners are so dejected and don't see a glimmer of light anywhere? Check out this article from the Wall Street Journal:

Small business owners became more worried about the economy in March, according to data released Tuesday....The National Federation of Independent Business‘s small-business optimism index fell 2.6 points to 91.9 in March....

Despite worries about future demand, small business owners plan to increase their selling prices. The report said the seasonally adjusted net percentage of owners reporting higher selling prices increased to 9% in March, from 5% in February. The reading has risen 20 percentage points since last September, the report said.

The NFIB said a major force behind the price increases is the elimination of excess inventories. The report also said profits are “badly in need of some price support.”....

The increased pessimism among small business owners in March echoes more downbeat views among U.S. consumers that showed up in two major surveys of household attitudes last month. ("Small-Business Optimism Declines", Wall Street Journal)

Not only are small business owners feeling depressed, but consumer confidence is plunging as well. This is from Gallup:

"Americans' optimism about the future direction of the U.S. economy plunged in March for the second month in a row, as the percentage of Americans saying the economy is "getting better" fell to 33% -- down from 41% in January.

Economic Optimism Declines Across Demographic Groups

While upper-income Americans remain more optimistic than their lower- and middle-income counterparts, optimism among both groups declined substantially in March. Despite Wall Street's strong first quarter performance, the percentage of upper-income Americans saying the economy is getting better fell to 41% in March from 50% in January, leaving it at the same level as a year ago. Lower- and middle-income Americans' economic optimism also fell in March, to 32%, from 40% in January....

Gallup's Economic Confidence Index Also Takes a Plunge in March....

...American consumers face several major challenges. Soaring gas and food prices not only reduce disposable income but also discourage additional spending as the cost of necessities increases. Global events, continued political battles about the budget in the nation's capital, and a weak, if modestly improving job market add to consumer uncertainties. As a result, it is not surprising that consumer confidence plummets even as Wall Street continues to do well.

However, if consumers continue to lack confidence and spending doesn't increase, it is hard to see how the U.S. economy can continue its modest improvement..." ("U.S. Economic Optimism Plummets in March", Gallup)

So, yes, the rich and well-heeled are feeling quite good about things of late, but the rest of us are in a constant state of near-panic just trying to figure out how we're going to keep the wolves away from the door. That may explain why--after 10 years of Bush & Obama--a growing number of Americans have given up on capitalism altogether. It's true! Take a look at this from GlobeScan:

"American public support for the free market economy has dropped sharply in the past year, and is now lower than in China, according to a GlobeScan poll released today.

The findings, drawn from 12,884 interviews across 25 countries, show that there has been a sharp fall in the number of Americans who think that the free market economy is the best economic system for the future.

When GlobeScan began tracking views in 2002, four in five Americans (80%) saw the free market as the best economic system for the future—the highest level of support among tracking countries. Support started to fall away in the following years and recovered slightly after the financial crisis in 2007/8, but has plummeted since 2009, falling 15 points in a year so that fewer than three in five (59%) now see free market capitalism as the best system for the future....

The results mean that a number of the world’s major emerging economies have now matched or overtaken the USA in their enthusiasm for the free market. The Chinese and Brazilians, 67 per cent of whom regard the free market system as the best on offer, are now more positive about capitalism than Americans.... ("Sharp Drop in American Enthusiasm for Free Market, Poll Shows", GlobeScan)

Whoa! How do you like them apples? The Chinese like capitalism more than Americans now. Can you believe it? And look at the beating that free markets took under Obama; down a hefty 15 points in one year, even worse than Bush?!? And, do you know why? Because even though things were scarier under Bush, most people still believed we could turn things around at the ballot box. Now they know they can't. Now they know the system is broken on a fundamental level and the changes they want can't be achieved through the political process.

And Gallup wonders why we're so depressed?

As for the economy, the problem is still deflation. The Fed's zero rates and $2 trillion in monetary stimulus have revved up stock prices and sent commodities skyrocketing, but housing prices continue to fall, unemployment is way too high (8.8%), and there's excess capacity throughout the system. Personal consumption will continue to flag due to stagnant wages and battered household balance sheets. That means demand will be weak and revenues will continue to shrink. Austerity-minded congressmen will further dampen the recovery by cutting costs and reducing aid to the states.

So, who's going to invest in this environment? Who's going to bet on a rosy future of booming sales and bulging profits when they know that the government is going on a fat-free diet, liquidity is drying up, and the Fed is pulling the plug on its emergency bond buying program?
No one, that's who.

That's why the end of June could be the tipping point, because when QE2 ends, deflationary pressures will reemerge and the economy will begin to teeter.

Eventually policymakers will see that fiscal stimulus is the only way to pull the economy out of the mud, but only after they have exhausted all the other options.

Deflation, Hyperinflation and Stagflation, Where Do We Stand?

By: Jesse

Well, the good news for everyone is that nothing seems inevitable here, that there is almost always a choice, but it is often wrapped up in a nice looking rationale, with all the compulsion of a necessity, for the good of the people. Us versus them in a battle for survival and all that. And clever leaders on the extremes provide the 'them' to be dehumanized and objectified. The leftist wishes to murder the bankers, and the fascist the lower classes and outsiders. The extremes of both end up making life miserable for almost everybody except for a privileged few.

And so I reiterate that in a purely fiat currency, the money supply is indeed fiat, by command.
People like to make arguments about this or that, about how so and so has proved that the Fed does not or cannot do this or that, that banks really create money only by borrowing, that borrowing must precede this or that.

It's mostly based on a fundamental misunderstanding of what money is all about, with a laser beam focus on hair-splitting technical definitions and loquacious arguments more confusing than illuminating, lost in details. In a simple word, rubbish.

Absent some external standard or compulsion, the only limiting factor on the creation of a fiat currency is the value at exchange of the issuers bonds and notes, and currency which is nothing more than a note of zero duration without coupon.

If I had control of the Fed, unless someone stopped me I could deliver to you hyperinflation or deflation without all that much difficulty from a technical standpoint. The policy reaction of those who might be in a position to fire or lynch me is another matter. The Fed not only has the power to influence money creation in the private banking system. It has the ability to expand its balance sheet and take on existing debt of almost any type at will and at any price it chooses.

But that is the case as long as the Fed has at least one willing partner in the primary dealers, and the Treasury is in agreement. And even that requirement for a primary dealer is not all that much of an issue given the amounts of existing sovereign and private debts of which the Fed might avail itself for the forseeable future.

So at the end of the day, a thinking deflationist is almost reduced to the argument that 'the authorities will not allow it' or 'will choose deflation rather than inflation' And this is technically correct. However, let us consider my earlier statement about those who might fire or lynch one for making a highly unpopular choice.

It is economic suicide for a net debtor to willingly engage in deflation when they have other options at their disposal, and especially when those decisions involve people outside the system.

That is not to say that the deciders could not opt for economic suicide, but the people designated to suffer and die for that choice and cause might not take kindly to it. Deflation favors the creditors significantly, and those creditors tend to be a minority of domestic elites and foreign entities. Both the extremes, hyperinflation and deflation, are choices best implemented in autocratic governments.

There are those who observe that Franklin Roosevelt 'saved capitalism' by his actions in the 1930's and I believe they are correct. If one considers the various other outcomes in large developed nations to the Great Depression, whether it be Italy, Germany, Russia, or Spain, the US came out of it fairly intact politically.

People conveniently overlook the undercurrent of insurrection and violence that was festering amongst the suffering multitudes, and the growth of domestic fascist and communist organizations. There were several plots to overthrow the elected government by military means, although the history books tend to overlook them.

So it is really about making the best choice amongst bad choices. This is why governments choose to devalue their currency, either with quantitative easing, or explicitly against some external standard as the US did in 1933. Because when the debt is unpayable, it must be liquidated, and the pain will be distributed in a way that best preserves the status quo.

Hyperinflation and a protracted deflation are both very destructive choices. So therefore no rational government will choose either option.

They *could* have those choices imposed upon them, either by military force, political force, or by economic force. Economic force is almost always the cause of hyperinflation.

So you can see why a 'managed inflation' is the most likely outcome at least in the US. The mechanism has been in place and performing this function for the last 100 years.

The problem or twist this time around comes when the monetary stimulus does not increase jobs and the median wages, because of some inherent and unreformed tendency in the economy to focus money creation and its benefits to a narrow portion of the populace. The result of this is stagflation which although not indefinitely sustainable can be maintained for decades. Most third world republics are like this. A vibrant and resilient middle class is sine qua non for a successful democratic republic, and this has strong implications for the median wage. The benefits and the risks of growth and productivity must be spread widely amongst the participants. Oligarchies tend to spread only the risks, keeping most of the benefits to themselves.

This is essentially the reasoning that occurred to me when I looked at the US economy and monetary system in the year 2000. 

The one point I remain a little unclear on is how 'hard' the law is regarding the direct monetization of debt issued by the Treasury. I am not an attorney, but I am informed by those familiary with federal statutes that this is a gray area in the existing law but currently prohibited. But it is easily overcome as I said with the inclusion of one or two amiable primary dealers who will allow the debt issued by Treasury to 'pass through' their hands in the market, on its way to the Fed at a subsidized rate. For this reason, and for purposes of policy matters, and occasional economic warfare, countries may tolerate TBTF financial institutions with whom they have 'an understanding.' 

I have also come to the conclusion that no one knows the future with any certainty, so we must rely probability and risk management to guide our actions.

So really absent new data the argument is pointless, a matter of uninformed opinions. The dollar will continue to depreciate, and gold and silver and harder currencies appreciate, until the fundamental situation changes and the US economic system is reformed.

I think there are other probable outcomes that involve world government and a currency war, and this also is playing out pretty much as I expected. Fiat currency can take on the characteristics of a Ponzi scheme, whose survival is only possible by continuing growth until all resistance is overcome.

This is the conclusion I came to in 2000. I admit I was surprised by the Fed's willingness to create a massive housing bubble, and the willingness of the US government to whore out the middle class in their deals with mercantilist nations; their hypocrisy knows no bounds. 

So that is the basis of much of my thinking and I wanted to take a moment to share it with you in a compact, highly condensed format.

I remain a little unsettled on the issue of hyperinflation, because there is the possibility that a large bloc of countries could join together to repudiate the dollar. Since so much dollar debt is held in these foreign hands, that is the kind of exogenous force that could trigger a bout of what might be termed hyperinflation. I don't see the dollar going to zero in this, but rather the dollar having a couple of zeros knocked off it, with a new dollar being issued. I have read John Williams case for hyperinflation several times now, and see nothing more compelling in it. 

Indeed I think the reissue of the dollar with a few zeros gone is inevitable. It is the timing of that event that is problematic. It could be one year, or it could be fifty years. There is a big difference there for your investment strategy.

And yes, the government could just get medieval on your asses, and seize all the gold and silver, force you to take the value of the dollar at whatever they say it should be. They could also seize all the farm land, all the means of production, and tell certain groups of people to get on freight trains for resettlement in Nevada. I think we can stipulate that governments can do this, and the people can accept it to varying degrees. If you wish to make this the dominant assumption in your planning then by all means.

For those who simply say "I disagree" or "Go read so and so he has proved this or that" I say that people believe lots of things, and can find data selectively to support almost any outcome they prefer, But the market is the arbiter here, and the verdict so far is beyond all question. The Fed is doing exactly what they said they would do, so there should be no surprises. And they have more in their bag of tricks. 

If there is new data I would certainly adjust my thinking but absent that I now consider this settled to my satisfaction, and wish to turn instead to more thinking on what changes need to occur to prevent the system breaking down, and restoring it to some semblance of reasonable functionality.

The Cure for High Prices

By John Mauldin

Today we once again think about the inflation/deflation debate, turn our eyes to Europe and the very interesting election happening there this Sunday, and speculate a little about what could derail the US economy.

But first, a quick note to Conversations subscribers. We have just posted a new conversation I did with Rich Karlgaard (Forbes publisher) and Andy Kessler. A found it fascinating to talk with two rational optimists who live in Silicon Valley and have watched the scene there for a very long time. I will soon be doing two more Conversations, the first with Neil Howe (The Fourth Turning, and one of the most astute experts on demographics) and the second with Albert Edwards and Dylan Grice of the Global Economics desk at Societe Generale and two of my all-time favorite thinkers.

For new readers, Conversations with John Mauldin is a subscription service where I sit down and talk with interesting people and let you listen in. You can learn more at http://www.johnmauldin.com/conversations/. If you want to subscribe or renew, use the code conv and get a 25% discount, plus access to all the previous conversations, plus a recent piece with George Friedman of Stratfor. Now, let’s jump into today’s letter.

The Cure for High Prices

The old line is that the cure for high prices is high prices. When prices rise, businesses tend to respond by producing more. If the price of something gets too high, then people buy less, which then leads to too much supply, which lowers prices. Rinse and repeat.

Last week I wrote about what I think is the potential for inflation in the US to rise to uncomfortable levels, in the 4-5% range. I got questions from readers asking if that meant I no longer thought deflation was an issue. The quick answer is no. Deflation, or at least low inflation, should be the normal trend. Prices should go down as we become more productive. But there is never a one-way street. Prices fluctuate. We got the Consumer Price Index numbers today, and we will use them as a “teaching” moment to think about the whole drift, the yin and yang, if you will, of inflation.

As a review, if the analysts at rent.com are right, rental prices for housing should rise 10% or so by the end of 2012. Homeowner’s Equivalent Rent is 23% of total inflation and 40% of “core” inflation (inflation without food and energy in the index). The Fed prefers to look at core inflation, as it is less volatile. They think that price movements in food and energy overstate inflation at some times and understate it at others. You can make a case either way, but for now let’s just accept that core inflation is what the Fed uses.

IF (a big if) rent prices rise by 10%, that will add 4% over the next 18 months to core inflation, which is a rather large move, but will also be something the Fed in theory should not ignore, all other things being equal. That could lead core inflation to be more than 3% and overall inflation back up over 5%. That will have the inflation hawks hyperventilating. It may force the Fed to raise rates sooner than they would like, or at least make them think a long time before diving into QE3.

Let’s look at the data that came out today. Core inflation was tame, but overall inflation is still running at over a 5% annualized rate (and above 6% over the last three months!). Let’s look at a graph from economy.com.

Core inflation remains tame, but the recent trend in overall inflation is still up. And given that we live in a world where we buy food and energy, it understandably annoys people to think that the people in charge are looking at core inflation when gas is $3.80 (or more!) a gallon. And as I outlined last week, there are reasons to think there is a transmission mechanism from QE2 to commodity price increases (www.johnmauldin.com and click on Thoughts from the Frontline, April 8, 2011 issue). And while correlation is not causation, the following graph from Russ Winter, at my friends from www.Minyanville.com, does make your eyebrows go up.

The subcomponents in the inflation index that have exposure to commodities are all up and show rising trends. The NFIB survey suggests that businesses are planning to pass on the price increases they are getting, although that is not in evidence yet.

Let’s Rewind the Inflation Tape

Now let’s look at inflation a few years back. Inflation was above 5% and I was writing that deflation was in our future – and got a few remarks from some corners about not being able to read a chart. And inflation was rising, but we were getting ready to go into a recession, and recessions are by definition deflationary. 

Predicting lower inflation was not all that hard. Let’s look at a few charts from the St. Louis Fed. This first one is the CPI for the last five years. Notice that inflation was high going into the recession.

Where did the rise in overall inflation come from? Let’s look back at what energy was doing back then. Here is a chart on the price of oil (West Texas Intermediate on a monthly basis). Notice that the correlation between inflation and rising oil is very high.

And as oil fell so did overall inflation, and with the rise in oil once again we have seen overall inflation begin to rise.

Now, let’s do a thought experiment. What if oil stays where it is today for one year? Then the inflation component of energy would be flat. Oil prices would still be high (as we think of them today) but not contributing to inflation. The CPI measures the change in prices over a period of time, not the effect of prices. High energy costs would still be a drag on the consumer society, but not get reflected in the CPI.

This is why Fed types, among other reasons, tend to not focus on volatile energy prices (which will correct themselves over time) but on things like wages, which are “sticky.” By that we mean, when you get a rise in wages, they don’t tend to go back down (absent losing the job and the next person hired at lower wages). Wage inflation is something the Fed does pay attention to.

As I noted above, core inflation could begin to rise going into the end of the year, even as the economy could soften with the expiration of QE2, persistent high employment, and high energy prices. I think the economy will grow at less than 2% for the latter half of the year, at least looking at the data we have now. That means that by the end of 2012 we could see inflation coming back down as the rise year-over-year slows.

A Shocking Development

I gave a speech today and was asked what I thought about the US economy. I said that, absent some kind of shock, we should continue to grow, albeit slowly. Of course that begs the question, what shocks are out there? I see two main ones. The first is an oil price shock with a slow economy. Another crisis in the MENA area (or Nigeria) that disrupts oil supplies even further could quite easily send oil to $150, which would not be good for the world economy.

But, following that thought, that would mean another recession and probably a global one, which would reduce demand for oil, which would help lower the price of oil as the crisis (wherever it is) gets resolved. And once again we would start talking about deflation, which is really just year-over-year price movements. 
Remember, recessions are by definition deflationary, as they reduce demand and increase unemployment.

The correlation between oil shocks and recessions is high, especially if the economy is not robust. Thus my worry.

Another Important European Election

And the second shock I worry about is the sovereign debt crisis developing in Europe. I have written about how Irish voters rejected funding their banks and about the ongoing negotiations. But this week we got a vote from Iceland that gives us some insight into how things may go.

Last year the Icelandic voters turned out the old government and rejected backing their bank debt, which was mostly to Britain and the Netherlands. The new government then renegotiated the terms of the debt. They lowered the interest costs to 3.2% spread out over 30 years, and no payment until 2016. Not bad terms if you can get them. The debt was incurred when Britain and the Netherlands compensated their nationals who lost savings in online “Icesave” accounts owned by Landsbanki, one of three Icelandic banks that collapsed in late 2008.

The Eurasia Review noted:

“Attempts by creditors to persuade nations to bail out their banks at public expense thus is ultimately an exercise in public relations. Icelanders have seen how successful Argentina has been since it imposed a crew haircut on its creditors. They also have seen the economic and political disruption in Ireland and Greece resulting from trying to pay beyond their means.

“Creditors did not give accurate advice when they told Ireland that it could pay for its bank failures without plunging the economy into depression. Ireland’s experience stands as a warning to other countries about trusting overly optimistic forecasts by central bankers. In Iceland’s case, in November 2008 the IMF staff projected yearend-2009 gross external public and private debt at 160% of GDP – but observed that an exchange rate depreciation of 30% would push the ratio to 240% of GDP, which would be ‘clearly unsustainable.’ But the most recent IMF staff report (January 14, 2011) shows end-2009 gross external debt at 308% of GDP, and estimates end-2010 gross external debt at 333% – even before taking the Icesave and other debts into account!”

Basically, the voters of Iceland were being asked to take on a huge debt based on foreign currencies over which they have no control. Voting no meant that acceptance into the euro club would not be likely (though that is not a club you might wish to join today!) There are other threatened measures. But absent the British or Dutch sending in troops, there is not much you can do to force that debt collection. Iceland’s voters sent the referendum a resounding 60% no vote.

Now let’s fast forward to Sunday and the elections in Finland. Yes, Finland, that bastion of euro correctness.
It turns out that some of the nation’s voters don’t see why they should “donate” to a fund that will bail out Greece, Ireland, and Portugal (for openers – forget about Spain!). There is a party, called (in translation) the True Finns party. It is a very nationalistic party and generally does not get more than 4% of the vote. But recent polls show their level of support has more than tripled and is approaching that of the three biggest parties: Center, National Coalition, and Social Democrats, which each have about 20 percent. It is very possible that the True Finns could get a sizeable vote. If the polls are right.

Why? Because they are the only way Finnish voters can say no to using their money to bail out other countries. Some 60% of 2,400 respondents in an April 8 survey by Think If Laboratories said they opposed bailouts, while 31 percent approved. The margin of error was 3 percentage points. (Canadian Press)
The True Finns note that no one rushed to their aid when they had their own crisis in the ’90s. The country has since gone on the “straight and narrow.”

60%! Wow! The True Finns have made it clear they will not go into coalition with any government that votes for more bailout funds. Think that same sentiment is not rising in Germany? Most people are concerned about the debtor nations rejecting the terms of the deal. Finland may show us on Sunday that the no vote works both ways!

As I understand the treaty, even the debtor nations must “guarantee” the debt that is used to bail out other countries, even as they accept bailouts. It is all for one and one for all. But what if Finland says no? Does that mean the end of the debt bailouts? Will the rest go on without Finland? Will other voters in countries with little deficits also decide that enough is enough? Can Angela Merkel keep her coalition together in Germany? The possibility of a crisis is high and rising. Stay tuned.

Home Again, a “Sports” Injury, and My Conference

I am back home for 13 days and ready to be in my own bed without obeying an alarm clock. These last trips, while fun, have been tiring. It was especially pleasurable to see my old friends Ed (of Crestmont Research) and Kelli Easterling in Oregon. He has built a fabulous retreat in the middle of their tree farm, under old-growth trees, very close to Corvallis. I like the city, but a few days of woodland retreat would be nice. And Tony Arnerich was a great host at his conference, with some fabulous Oregon wines and dinners with fascinating people.

I (literally) limped home. My left heel has been getting worse and worse and the pain sometimes is pretty intense. I went to the podiatrist this morning. He came in and posted the x-rays and I said, “That doesn’t look right, does it?” Turns out my right heel is quite inflamed. He confirmed what Dr. Mike Roizen told me Wednesday night at Mehmet Oz’s fundraiser. Moving my foot, which seems to help the pain, actually makes it worse. Kind of like bursitis, but in my heel. He wondered what I did to bring on the injury. “What have you done to change things in the last three months?”

“Well, I did start working out with a new trainer, doing lower weights, higher reps.”

“She has you doing lots of lunges, doesn’t she?” “Yes.”

“You didn’t do many before, did you? You just exacerbated the heel, creating an inflammation. Let’s call it a sports injury,” he said with a smile.

So now, for the next 4-8 weeks, I will be wearing this large brace to immobilize my foot. It looks like I broke my ankle skiing. I can take it off for speeches, but the more I wear it the faster I will heal. Oh well.

I will go to La Jolla in about 13 days, and wear it there most of the time. I guess I will get used to it. The conference has again sold out, and this one looks to be even more fabulous than the last seven. And I am working on a new speech on a new topic. Lots of fun research, and nice to be home to do it.
Time to hit the send button. Dinner with friends beckons. Have a great week!

Your feeling kind of silly in a brace analyst,

John Mauldin

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THE GOLD/WHEAT RATIO

By Tom McClellan
Gold/Wheat Ratio
You could have bought a bushel of wheat in 2004 for around $3. Now, you’ll have to pay more than $7. Who says that there is no food inflation?
Unlike computers, cars, housing, and a lot of the other goods and services that the BLS uses in the Consumer Price Index, there have not been any “heuristic” improvements in wheat. Heuristic adjustments to the CPI calculation take into account factors such as technological improvements that make products more valuable. Your computer today is faster and more capable than your PC 10 years ago. Your car has airbags, and better pollution controls.

Wheat does not have those sorts of improvements, at least not for the consumer. The wheat grown today may be somewhat more disease resistant than in years past, and farmers may be able to get a higher yield per acre, but for the consumer a bushel of wheat still offers just about the same number of calories, vitamins, and other benefits now that it did 200 years ago. So the price of wheat is perhaps a good measure to use in gauging price inflation without those pesky heuristic adjustments.

This week’s chart takes a look at the ratio of gold prices to wheat prices, in order to see whether the rise in gold prices has taken it too far ahead of the inflation in other commodities. The ratio saw its all-time high in May 2010 at 263. The arrow highlights the current level for this ratio, which is 197. Due to the math involved, this chart reflects not only the ratio of the dollar prices of each commodity, but also how many bushels of wheat you could get for your ounce of gold. A high number means that gold is really valuable in comparison to this one component of our food basket. 

Both gold and wheat have become somewhat easier to generate over the last 2 centuries, with innovations in mining and smelting taking place alongside innovations in planting, fertilizing, and harvesting of grains. Men don’t kneel by a creek much any more to pan for gold, and neither do they harvest wheat with a scythe. But those improvements in the technology for each commodity have not taken place at the same rate, which likely explains some of the secular growth in this ratio.

There is an interesting cycle evident in the tops for this ratio, with important highs appearing about 42-47 years apart. Tops appear at other times too, but without the same regular periodicity of around 45 years. That same approximate cycle length also shows up in the stock market, economic wars, gold rushes, and other social phenomena. The next peak is therefore due sometime in the 2020s, at which time it would be the smart decision for investors to rotate out of overvalued gold and into food (or into the capacity to grow food).

One problem with looking at the gold/wheat ratio in this way is that it examines the price of each of them contemporaneously. That may not be the right way to look at this relationship, since we know that gold prices tend to lead the price changes in other commodities. So this next chart looks at the raw prices for gold and wheat, with the gold price plot shifted forward by 12 months.
Gold prices lead wheat prices
I have shown in past articles how gold prices act as a leading indicator for a lot of things, such as CPI inflation, crude oil prices, and the CRB Index, so it is not surprising to see wheat prices follow gold’s lead in this way. The implication of the higher gold prices we are continuing to see right now is that we should expect wheat and other food prices to continue rising. We can only expect to see a peak in food prices about a year after we see a peak in gold prices.

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