Monday, April 25, 2011

How Do Top Line Numbers Look?

by Bespoke Investment Group

Last week we did a post on how earnings were coming in versus expectations this earnings season, and below we highlight how revenues are doing. While bottom line numbers got off to a slow start, top line sales numbers have been strong so far. As shown below, the revenue "beat rate" currently stands at 73% this earnings season, which would be higher than any other earnings season during the current bull market if the reporting period were to end today. 



PUTTING PAST BUBBLES TO SHAME

by Cullen Roche

And you probably thought the oil bubble in 2008 was a big deal? Well, the CRB Spot Index of 23 markets (which EXCLUDES oil) now dwarfs the 2008 move. This bubble is not only larger, but it is substantially broader in terms of the markets included. Few markets have been excluded from this price surge:


This is such an extreme disequilibrium that I think the Fed has to now very seriously consider that they have contributed to this rise in commodity prices. Several independent sources have come out to counter the propaganda out of the various Fed banks claiming no involvement in the commodity price increases. It would be nice if the Federal Reserve stopped playing doctor on the US economy and actually tried to objectively quantify the impact their actions have had. To anyone with a working set of eyes it is fairly clear that the Bernanke Put is working its magic in most destructive ways.

See the original article >>

What happened to $?


Hmm. I think it’s not a surprise what is happening to $. You can read The Wall Street Journal, watch CNBC, Bloomberg – a lot of information about our deficit, easy money etc.

I look at the chart of UUP and ask myself: “are we there yet?” It’s getting closer, just for a bounce.


Nobody likes the $. Look at 5 year weekly charts of FXY, FXE, FXF and even FXB. Look at emotions in charts of SLV (parabolic), GLD (looks a bit like rising wedge).

TLT looks like it was following the pattern of UUP until just couple months ago. What does it mean? $ dropping but TLT bouncing. Does it mean that it’s just us, our pensions, and our mutual funds buying our own bonds recently?


TIPs are doing just fine (check the 5 year weekly chart of TIP). They are inflation protected. This is very telling.

I live in the Phoenix area and watch the real estate market here, flooded with homes from foreclosures and short sales. It’s very interesting to see the recent changes in the inventory of the houses for sale. It is drying out. It may not be a permanent change in trend, but it is a good sign. 

You may ask who is buying all these houses. The market is getting a lot of cash buyers from Canada, France, Japan and other international investors. So the low dollar is attracting a lot of money from outside the US; but not enough to push the $ up.
See the original article >>

The Lobbying Bubble

By Barry Ritholtz

In the podcast I did with Dylan Ratigan last week, I mentioned we needed a Constitutional amendment mandating public funding of all federal elections. It seems to be the only way imaginable to get all of the dirty money and corporate lobbying efforts out of each and every attempt to close tax loopholes, reduce overall spending, and fix the tax code.

As if on cue, Tim Iacono points to this outrageous chart (via Time Magazine) showing how much dirty lobbying money has poured into DC over the past decade:
>

See the original article >>

Real Interest Rates Explain the Gold Price Perfectly…Too Perfectly?


The latest idea coming out of the “Hedge-Fund” camp that I saw to explain the recent meteoric climb in the price of gold as expressed in US dollars is “Real” interest rates.

Leaving aside what is “real” and what is illusion for a moment, if you take a timeline of the US 10-Year Treasury yield and subtract the published CPI number you get to one (of many) estimates of “real” interest rates. Then you cumulate that number, you can build a reasonably decent “explanatory” model to explain the price of gold, since say January 2002.



Month on month the correlation between those two lines is 95% , so you can say that the changes in the “real” interest rates since January 2004 can “explain” 95% of the changes in the price of gold.

And the logic there is I suppose that the price of gold “ought” to give you a “real” return on your money, although over the past seven years gold went up nearly five times but the “real” return on a 10-Year Treasury was about 13%.

If you buy that logic then to know where the price of gold is going, all you need to do is guess where American CPI and where the 10-Year Treasury yield is going. There again, there are plenty of other explanations for the current price of gold. Here are three good ones:

1: The Austrians:

The “Austrians” say that “fiat money-printing” by central bankers debased and destroyed the value of money in general, so the value of “real” money (gold) went up. That’s a logical argument; certainly the explosion of the price of gold tracks (sort of) the explosion of the US Federal Reserve balance sheet over the past few years.

Although it’s quite hard to fit facts to the reality, gold started going up before the Fed started expanding its balance sheet, and in any case the connection between the balance sheet and “money printing” is tenuous.

That’s because the Fed is supposed to lodge collateral (US Treasuries or MBS for example) with the Federal Reserve Agent (a government employee), prior to printing money. So the idea of “Helicopter Ben” just irresponsibly turning on the printing presses whenever he feels like it; is a bit of an old-wives-tale. Of course you can debate what value the Federal Reserve Agent accepted for the $1.5 trillion of MBS that the Fed put up as collateral, but most of that money just turned straight round to be put on deposit with the Fed so the affected banks could bolster their capital adequacy. 

Thus the logic in the Austrian camp tends to be weighted towards philosophical arguments (often quite long-winded), which may be right, but they are as hard to pin-down. The problem I have with all that is the idea that central bankers and those who sail with them were FIVE times more venal and/or incompetent, over the past seven years than they were in the past twenty years (when gold was much cheaper).

2: Oil and Gold:

There is a pretty good correlation between the price of oil and the price of gold since 1971 when gold was “liberated” from the grasp of central bankers (74% R-Squared).

There is an attractive logic there in the sense that gold has a fundamental irreplaceable value in society and so does oil. The problem with that logic is that at $125 oil the “fundamental” price of gold should be $1,100 or so, so either (a) there is a bubble or (b) the valuation model does not stack up, or (c) oil is on it’s way up to $175 a barrel and gold is simply front-running that inevitability.

The issue on that count is at what point the “fundamental” price of oil will migrate from what it is as dictated by “Parasite Economics” (how much the world can pay without it’s economy being damaged – currently about $90), into the “replacement cost” which is how much it will cost to find new supplies, which potentially can go up exponentially if the “Peak Oil” argument holds water.

3: “Effective Current Account Deficit”

The idea there is that (a) the fundamental value of the dollar (i.e. against something with “fundamental value” ought to be reflected in the cumulative US trade deficit (goods + services) (b) except since 2000 you have to treat any “US Securities Other Than US Treasuries” (line 66 of the BEA International Transactions – sometimes called “Toxic Assets”), as “exports”, as in the loans won’t get serviced so the net result is that USA “exported” the title to a proportion of their homes.

Add that up and you get a line that tracks the price of gold pretty accurately since 1993, in fact it explains the changes in the price of gold expressed in dollars much better than either the price of oil (well oil had a bubble and a bust), or “real” interest rates.

I admit that’s a pretty whacky line of logic, but it does at least provide a measure of the cost to America of living beyond its means, in comparison to the reality of its economy compared to that of the rest of the world. Only by that logic the “correct” price of gold is $1,200 today.

Comparing the three approaches


Discussion:

1: The problem with “real” interest rates as an explanatory variable is that it only started to “work” in about 2004. One thought that comes to my mind is that perhaps the clever hedge fund herd is tracking that variable these days…and perhaps they have the wrong end of the stick? That wouldn’t be the first time the too-clever-by-half hedge-fund boys got it wrong.

2: Oil is a big part of why America runs a trade deficit, but it’s not the only thing.

3: The best correlation is the trade deficit, which at least does not require a long-convoluted argument to explain away; if (a) gold is a substance that accurately measures value long-term in the world as a whole, and (b) America is living beyond its means reference the whole world (and in that regard the trillions it spends “defending” itself sound more and more like narcissism as time passes), then ultimately, what America will be able to afford to buy from the rest of the world, will go down, thus the dollar compared to “value” in the rest of the world will go down.

That story-line suggests there may have been some “over-cooking” over the past six months, only time will tell.

Euro USD Currency Elliott Wave Technical Analysis


We have written about the Euro in sections of various reports before, but this is the first report dedicated just to the EURUSD. The Euro, the currency of the European Union, replaced the ECU, a basket of european currencies, in 1999 on a 1:1 basis. For the record the Euro officially started trading in 1999. However, we do have charts for the ECU going back to 1991. In the 1990′s the basket of ECU currencies contained twelve different currencies. 

The largest components were the DEM 32%, FRF 20% and the GBP 12%. Oddly enough, as you will observe from the following charts, the ECUUSD had only twice the value of the DEMUSD. Even though the German DEM made up only one third the value of the ECU basket. The following charts clearly display this 2:1 relationship.

This first chart displays the DEM from 1960 to 2005.


The second chart displays the ECU/EUR from 1991 to 2011. Notice the 2:1 EUR to DEM relationship during most of the 1990′s into the 2000 low. The whole point of comparing the DEM to the ECU/EUR is to aid in our historical analysis of the Euro.


When we review the DEM chart we observe the typical cyclical price movement of the established western currencies. Cycle peaks every 17 years and cycle lows about every 17 years as well, but only offset by 7 years. Counting from the Supercycle low in 1985 we have a double zigzag Cycle wave [A] advance into 1995. This aligns with the Cycle wave [A] wave peak in 1995 for the ECU/EUR.

Then between 1995 and 2000/02 both the DEM and ECU/EUR declined in three Primary waves into a Cycle wave [B] low. Nearing that low we need to default to the EURUSD charts since the Euro started trading in 1999. After the 2000/02 Cycle wave [B] low the EUR embarks on a multi-year, double zigzag, Cycle wave [C] to complete the Supercycle bull market. We see the first completed zigzag between 2000 to 2008, (EUR 82.00 and 160.20). Then the Primary X wave into the 2008 low at EUR 123.94. What follows is the second ABC Primary wave zigzag into an anticipated 2012 top. Primary waves A (EUR 151.44) and B (EUR 119.13) have already completed. Primary wave C has been underway since early 2010.


The EURUSD weekly chart above better illustrates the current Cycle wave [C] and Primary waves A, B and C. Notice Primary wave A (EUR 123.94-151.44) was a zigzag with three Major waves, and Major wave C subdivided into five Intermediate waves. Primary wave B (EUR 151.44-119.13) was a simple wave. Primary wave C, however, is also unfolding as a zigzag with three Major waves. In fact, Major wave C may subdivide into five Intermediate waves before it concludes.

When we apply fibonacci relationships to the entire structure we arrive at a 2012 EURUSD topping range between 155 and 159. The details. At EUR 159 Cycle wave [C] = Cycle wave [A]. At 157 Primary C = 1.5 Primary A. Then at 155 the second ABC of Cycle [C] = 0.382 the first ABC of Cycle [C]. You can track the Euro along with use by scrolling down the following link: http://stockcharts.com/def/servlet....

Platinum's prospects to get better and better

by Geoff Candy

Growing demand for diesel cars and trucks and a continued tight supply side, mean platinum's outlook is pretty good.

According to Leon Esterhuizen of RBC Capital Markets, while the "pressure cooker" situation that was anticipated at the beginning of the year as a result of a supply side squeeze has reduced somewhat recently because of unforeseen events such as the earthquake in Japan, there is still likely to be a shortage of the metal this year.

Speaking on Mineweb.com's Metals Weekly podcast, Esterhuzien added that while the impact of the Japanese crisis remains uncertain, it is interesting to note that, "Impala [Platinum] said recently that all of its Japanese clients continue to take metal even though they offered them the opportunity not to take metal right now."

"That sort of tells you that the people who are fundamentally involved in this market understand that there is probably going to be a shortage of metal - even if you're not using it right now, you better take it and you better start building stockpiles."

Part of the reason for this is the continued concern about the supply of PGMs from South Africa. Last week, Anglo Platinum, for example, announced production numbers almost 200,000 ounces less than they should have been doing on an average quarterly rate.

Esterhuizen says, while Anglo Platinum says it believes it can make up the shortfall, "if you look at things like the labour union activity that's currently building up - unions really starting to flex their muscles saying that this is the year they want another 15% raise - there is a real possibility for disruption there."

Over and above that, the country's continued power worries, mean, he says, "There is a very significant probability of disruption" and "even if we squeeze through this year by some or other magic, it's known that it's going to get a lot worse in 2012 and 2013 in terms of power supply."

On the automobile front, which has long been the main driver of PGM demand, Esterhuizen says that, while Chinese auto sales growth for March disappointed the market at only 6% when the expectation was for a number closer to 10%, currently, US growth, which is well in excess of 15%, is making up for it.

"Remember that the Americans all drive fairly large cars compared to the Chinese who drive fairly small cars. Growth in the US is actually far more positive for the market than what the Chinese growth number would be," he says.

He adds, " I believe the clever money is now starting to shift to platinum. You can see the high oil price in particular driving people to buy fuel efficient cars, and that is where diesel comes into the picture. It's interesting to note that the European car numbers were down roughly 5% for the quarter, but inside of that the diesel car market share actually grew by 2%"

He says, another good sign for the platinum market is the "phenomenal increase in production numbers for big trucks - the 16-wheelers - we're talking 40% growth rates in that market. That's very good for platinum and for diesel. Then in the US - people don't point to this, but even though the diesel market there is pretty small, it's growing at double digit rates."

All in all, Esterhuizen believes that while we are likely to see a positive market this year, "it's really building up into a better market next year, which is a good story for any investor - you don't want to be plugged in just for three or six months." Especially when one considers that the stocks themselves have been de-rated rather aggressively in the last two years.

"When you look at them relative to price cash flow multiples - price earnings - relative to the underlying metal price - all of those metrics have come down nicely so they're not looking as expensive as they used to - they're not continuously pricing in much further metal price rises.. the long and the short of it is I see valuations are low enough to get investors in this space - I see a positive outlook for the metal prices - that makes for a good investment scenario," he says.

After silver, Copper is next in line to be gold

By Sebastien Wright

Many people invest in precious metal commodities such as gold and silver but not everyone considers non-precious base metals like copper and nickel.

Unlike precious metals, the prices of base metals are more related to the health of an economy than emotion or world events. Another appealing thing about investing in base metals as the amount of capital involved is considerably less than precious metals.

What does the future hold for copper? Obviously nobody has a crystal ball but if we look at history first, we may get a glance into what the future might hold. In the 1990's, copper prices realized some significant increases due mostly to strong demand from telephone companies who were building copper infrastructure prior to the explosion of fibre optic construction.

This increase in infrastructure spend resulted in a glut of copper when the telecom industry fell upon hard times and also when fibre started to replace copper.

Fast forward to today and we are seeing an unprecedented demand for copper when we look at growing infrastructure demands from emerging economies such as China and India. As wealth is built in these economies, the demand for infrastructure increases exponentially and when we consider materials such as copper for use in electrical wiring and plumbing, one can predict that the demand for copper should continue to increase.

For the investor interested in copper as an investment, there are many methods to consider for investing. One can try and determine the best metal stocks to purchase but doing statistical analysis on commodities. Since copper is so closely tied to the health of the economy, another investment to consider could be index ETF's or mutual funds. Another means of investment would be to purchase copper bars or bouillon.

Another seemingly less sophisticated means of investing in copper but my no means less effective is to collect pre 1982 pennies. Many people may not be aware of this but pennies made prior to 1982 are made from pure copper whereas pennies made after 1982 are only coated in copper.

This may sound insignificant but to illustrate the value of this, a pre-1982 penny is current worth 2.9 cents in it's weight of pure copper! This equates to basically 3 times the penny's face value and could conceivably increase as copper is in higher demand.

Another interesting thing to consider about copper is that it may play a significant role in future purchasing as the US dollar and other currencies continue to lose value. Many experts agree that fiat currencies (basically paper currencies) all lose value over time but a commodity such as a base metal or precious metal do not.

The challenge with using gold for example as a currency is that is almost too valuable. If you needed to make a small purchase and all you had was an ounce of gold, this would not be ideal. It would be like purchasing a chocolate bar with a $1000 bill! Metals such as copper on the other hand that have a traditionally lower value per ounce would make an ideal metal for smaller purchases.

In closing, base metals such as copper may not be nearly as sexy as gold or silver but in the long run, a commodity that has a real use in construction and one that is tied to the world economy should continue to be in demand. As with any investment, the key to success is education and knowing what you are doing. There are many books available as well as online information on how to invest in copper and other metals.

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What’s Really Driving Up Stock Prices?

by Josh Lipton

Market pros will tell you that the Dow Jones Industrial Average last Thursday did one of the most bullish things any price measure can do: it made a new multi-year high.

There are various explanations behind the rebound in stock prices. For one, many investors believe that the US economy is now on the mend. Second, there have been a number of better-than-expected earnings reports from companies like Apple, Intel, Yahoo, IBM and United Technologies, which has motivated you and your neighbors to bid up stock prices.

However, Tom McClellan, a veteran technical analyst and editor of The McClellan Market Report, offers another reason for the advance: the Federal Reserve keeps on printing more money and pushing it into the banking system through Permanent Open Market Operations (POMOs), or the Fed’s program of T-Bond buying.

This is a bullish factor for the market. As McClellan explains, the Fed takes bonds out of the hands of the big banks and gives them cash. That cash then has to go somewhere, so it works its way into the economy. “It gets to the economy by way of the stock market,” says McClellan. “More cash in the banking system means more liquidity to drive up stock prices.”

To chart the impact of this money printing, McClellan recently looked at the 5-day trailing sum of POMOS over the past 5 days. If you were to divide this number by 5, it would be a 5-day simple moving average.

One interesting finding from looking at it this way, says the analyst, is that the stock market tends to race upward faster if the POMOs have been big in recent days. The March 16 bottom that we all figured was due to the disaster in Japan, says McClellan, just happened to coincide with a drought in the Fed’s POMOs. Last week’s rebound in the S&P 500 matched an upsurge in POMOs.

The Fed publishes a list of its intended T-Bond purchases, which can be viewed here. Our trusty policymakers list a range of values, such as $6-$8 billion on April 25 and $1.5-$2.5 billion on April 26.

So McClellan, using the mid values of these ranges, projects what this line will look like in the sessions ahead. As the chart below highlights, it suggests a dip this week and then a big upsurge again.

Click to enlarge

The implication, says McClellan, is that we might see some consolidation of recent gains early this week, but there are still more gains to come for the stock market courtesy of the Fed’s money pumping efforts.

China "imported enough sugar to ensure 2011 supply"

By Niu Shuping and Tom Miles

China's 2010/2011 sugar output is expected to slip this year to 10.5 million tonnes, down from 10.74 million tonnes last year, but the government has already stocked enough imports to cover any deficit, an industry website quoted government officials as saying on Monday. 

"We have already imported quite a volume to replenish reserves, far more than needed to cover the deficit in producing areas, and also enough to ensure the supply for the current year," said Liu Xiaonan from the National Development and Reform Commission, the government's top economic planning body. 

But Liu did not say how much China had imported for its reserves and, without supporting figures, it was unclear how the government could have covered a deficit that some analysts estimate at 3 million tonnes. 

In December China's Commerce Minister Chen Deming said China would import to shore up its reserves of sugar, meat and other staples. [ID:nTOE6BL05Q] 

But in the first three months of this year, sugar imports totalled only 79,000 tonnes, suggesting little change in the government's stockpiles of imported sugar since Chen's speech. 

That compares to record imports of nearly 1.8 million tonnes in 2010, which must have included about 800,000 tonnes of government buying, based on the quotas available. Private buyers are only entitled to 30 percent of China's 1.945 million tonnes of annual import quotas, leaving the government with 1.362 million tonnes of quotas in addition to up to 400,000 tonnes via a government-government deal with Cuba. 

The window for imports was open because import prices were currently lower than local prices, Liu told a national sugar conference in Kunming, according to a transcript of his speech posted on an industry web site (www.gsmn.com.cn). Liu, in an effort to calm rising prices, warned merchants and mills not to hoard sugar and said that higher prices could spur use of more substitutes. China's sugar consumption may not increase as much as earlier expected and may even be flat or lower than in 2010, he said. He did not give any numbers.

The government has already released 760,000 tonnes from reserves during the current marketing year, which started in October, as part of efforts to tame food inflation after sugar prices <0#CSR:> hit record highs. 

The sugar market was in the sights of a government crackdown in the last months of 2010, along with corn, cotton and rubber, after speculative cash poured into Chinese futures and threatened to drive up wider inflation. 

Worries about supply pushed global prices to a 30-year high in February, but subdued demand and receding supply concerns later pushed the market down by about 30 percent. 

But long-run growth in Chinese consumption and imports "should ensure that the trough in the current global sugar price cycle remains higher than levels experienced following previous price spikes", analysts from the Commonwealth Bank of Australia said in a note to clients. 

Australia and New Zealand Banking Group Ltd said last week that China could import up to 1.8 million tonnes within the next three or four months to capitalise on weak prices, especially from Brazil [ID:nL3E7FI0G8] 

"We anticipate an elevated level of sugar imports into China this year with domestic production likely to stay weak for a second consecutive year due to adverse weather impacting Guangxi," the largest sugar region, said Barclays Capital in a written report. 

Wang Ge, a divisional head from the Agriculture Ministry's crop department, forecast this year's crop at 10.5 million tonnes and said the government wanted to maintain self-sufficiency in sugar at about 85 percent, with imports at the current rate of about 2 million tonnes. 

But Liu Hande, head of the Guangdong Sugar Association, forecast a wider deficit of 3 million tonnes, with output of 10.4 million-10.5 million tonnes and consumption of more than 13.5 million tonnes. 

Liu said despite record sugar prices, farmers were not willing to expand sugar acreage by a big margin due to limited farmland and higher labour and production cost. 

China's sugar acreage has remained steady at about 28 million mu (1.87 million hectares) over the past few years. Low-yield strains coupled with low efficiency have contributed to difficulties in raising output, Wang told the conference. (Reporting by Niu Shuping Tom Miles; Editing by Jonathan Hopfner and Ken Wills)

See the original article >>

Velkommen to Banktopia

By: Mike_Whitney

Let's talk turkey. The dollar is getting hammered by the day. And the dollar is getting hammered by design, because the Fed wants a weaker currency to boost exports and lower the real burden of debt on the banks. (Yes, Martha, the banks are still insolvent) So, down goes the greenback, lower and lower, pushing up gas and food prices while the buying power of the average US worker vanishes down the plughole. And this process will continue for the foreseeable future because--as Obama stated earlier in the year--Washington is committed to "doubling exports in the next 5 years." Think about that: "the next 5 years". That's the same as saying that the American worker will be reduced to third-world poverty in a half decade or so. It's a death sentence.

And none of this has anything to do with lowering unemployment or raising GDP. In fact, the revisions of first quarter GDP reveal the lies behind the policy. The first announcement from the Commerce Department put GDP at 3.2%. Remember that? Now we've slipped to 1.4% and some predict the final revision could actually show negative growth. This is from the New York Times:

"Earlier this week we wrote that several prominent economic forecasters had lowered their estimates of gross domestic product growth in the first quarter of this year. Today saw even further declines. Macroeconomic Advisers, a forecasting firm, lowered its estimate to just 1.4 percent annualized, when just a few months ago they had pegged the number at 4.1 percent.

Capital Economics likewise brought its estimate down to 1 percent, writing in a client note:

Every data release last week seemed to necessitate a further downward revision to our first-quarter GDP growth forecast. By the end of the week when the dust had finally settled, that estimate was down to only 1% at an annualized pace. Indeed, there is now even a decent outside chance that the economy contracted outright." ("G.D.P. Estimates Slide Further", New York Times)

So, it's all baloney. The economy isn't growing. How could it be? Wages are flat, credit is still shrinking, (excluding student loans) and the only reason the unemployment numbers keep dropping is because more and more people are falling off the unemployment rolls. Everyone knows that. So, while there may be a slight uptick in consumption and retail; don't be fooled. It's just because it costs more to put food on the table or drive to work, not because people are scarfing up trinkets at the mall or living the highlife.

And the American people know what's going; they can see through this "green shoots" charade. That's why the latest survey from the New York Times showed that the "Nation’s Mood (is) at the Lowest Level in Two Years" and that "Americans are more pessimistic about the nation’s economic outlook and overall direction than they have been at any time since President Obama’s first two months in office when the country was still officially ensnared in the Great Recession." ("Nation’s Mood at Lowest Level in Two Years, Poll Shows, New York Times)

People have lost faith in Obama, the congress, and the political process itself. They can see that the system is broken and no longer responds to the will of the people, which is why they're throwing up their hands and giving up. It's obvious. Gallup found the same thing. Here's a clip from their recent poll:

"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....Optimism about the future of the economy declined across all political parties during the first quarter....Gallup's Economic Confidence Index, which includes the economic optimism measure, also plunged in March..." ("U.S. Economic Optimism Plummets in March", Gallup)

So, all the "happy-times" propaganda has had zilch effect. The public's not buying it. They know we're in a Depression. How could they not know? They're underwater on their mortgages, they can't get a loan, their kids and Uncle Arnie can't find work, and the guy in the Oval Office won't do a damn thing to help out. Is it any wonder why so many people are giving up on capitalism entirely. Just take a look at this survey from Globescan for a real shocker:

"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.....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.
GlobeScan Chairman Doug Miller commented: “America is the last place we would have expected to see such a sharp drop in trust in the free enterprise system. This is not good news for business.”

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)

Can you believe it? The Chinese like capitalism better than Americans. How's that for irony? And, don't kid yourself, the average working slob isn't spending his evenings thumbing through the Communist Manifesto while strumming L'Internationale on his 6-string. That's nonsense. Americans are practical people. They know they're getting screwed by both parties which is why their support for capitalism has eroded even faster under Obama. It fell "15 points in a year" since 2009. Way to go, Barry. 

And things will only get worse when congress starts hacking away at the budget deficits, eliminating popular programs and services. That will just add more fuel to the fire and convince people that the system is beyond repair. Bottom line: Conditions will steadily deteriorate, activity will slow, and economy will enter a period of protracted stagflation.

But that doesn't mean Wall Street will suffer. Hell, no. The markets will continue to bubble ever-higher fueled by lavish injections of monetary stimulus from the Fed just as they have for the last 3 years. As Bloomberg reported earlier in the week, Bernanke does not plan to end QE2 at the end of June as scheduled, but will continue to recycle the proceeds from maturing mortgage-backed securities (MBS) into bond purchases to ensure that the Blue Chips continue to post record profits while 42 million workers scrape by on food-stamps, and a couple million more wait to get booted out of their homes. Sounds fair, doesn't it?

So, if it seems like the big banks are writing the policy; it's because they are. Think of it like this: The US government keeps two sets of books. One is a record of all the public's revenues and debts. The other is an off-balance sheet operation run by the Fed. When congress spends money, it must be approved through the normal democratic process. When the Fed spends money, it simply writes a check on an account backed by "the full faith and credit of the US Treasury" without any oversight or supervision. And, the debts that it rings-up, do not add to the budget deficits or force policymakers to impose constraints on the banks. No way. 

The $2 trillion in junk mortgage-backed securities (MBS) and other handouts the Fed has given to Wall Street since Lehman collapsed, should have sent the deficits into the stratosphere and forced the resolution (bankruptcy) of the nation's largest banks. But they didn't, because the Fed's losses are kept "off-budget", where they don't attract congress's scrutiny. So, anything goes. The only problem is that the Fed's trillion dollar Bank Welfare Project has led to diminished buying power and a plunging dollar. So, it would be more accurate to call QE2 a stealth tax on working people, instead of "monetary stimulus".(which it is not.) The truth is, Bernanke is deliberately flogging the dollar to help his underwater bank buddies stay afloat and to keep stocks "frothy". But the net-result is a huge loss of personal wealth for everyone else. These are the real losers in Bernanke's QE shell game.

Looking ahead, it will be more of the same. Stocks will continue to rally, the red ink on the Fed's balance sheet will continue to build, and the dollar will continue its agonizing descent into oblivion.
The Fed is running the whole shooting match now and the rest of us are just bystanders with no say-so. Velkommen to Banktopia. 

Silver Forecast $52 to $56 by Mid 2011 Update


Back on February 18th I wrote an editorial showing that Silver could rocket up to $52 to $56 by mid-year. At the time of the writing Silver was sitting a little above $32 on the price chart. The original chart work was based off of the fractal chart work I do with Silver from previous fractal time periods. So far the rise in Silver appears to be right on track for our expected targets to be approached into mid-year. I will post a link to the original article, below, for your perusal.

Silver has entered the more parabolic path of this historic PM Bull very much like it did back in the late 70’s. If you want to get a general idea of how far Silver still had to run back in the 19780’s, you can look at the original article link, above, where I posted a long-term chart of Silver back to the 70’s. On the 70’s chart of Silver in that article, I placed a circle on the analogous place for Silver in the 70’s compared to where Silver was on the chart when I wrote the original public article.

To some extent, Silver is like the canary in the coal mine when it comes to the Vth Wave advance of the Precious Metals Bull. The price of Silver acted the same way in the 1970’s PM Bull Market since it takes a lot less speculative money to drive the price of Silver parabolic than it does for Gold. Don’t forget the many times when Silver has led a charge in the PM sector to new highs only to be left like Wiley Coyote running into thin air off of a cliff.

Obviously, something is different “this time.” This time Silver has run wild on the upside, and Gold is following in its footsteps. In fact, smaller investors can help to contribute to the advance into Wave V for Silver since it is easier for them to accumulate a larger amount of Silver with its lower price. This is one point in a market cycle where what many call “Smart Money” can be out-run by smaller investors.

The early run by Silver into Vth Wave Chart Metrics, or phase transition into the true Vth Wave Channel, is the early recognition point for all of the markets that the Vth Wave devaluation in the U.S. Dollar is at hand. Markets are discounting mechanisms, and the move of Silver into the Vth Wave Channel leads Gold into its own Vth Wave Channel slope of rise by just an eyelash on the long-term charts.

THE FRACTAL SILVER CHART

A look at the chart below of Fractal Silver in comparison to the previous fractal period in the recent past-2006 shows that Silver is approaching the lower red dotted line in the current time period very similarly to how it did back in the 2006 period. This rise has important ramifications for Gold, but I will include those comments in a different update on the Fractal Charts of Gold that I expect to come out later this week. 


(This Fractal Silver Chart was created on February 20th of this year. I have moved the black and the red arrows in this recent time-frame up on the chart so that I can show some Fractal Relationships in a series of current public editorial updates that will be coming out over the next few days. We provide a more focused view of many of these relationships to the subscribers at our website.)

The topping pattern for Silver in Fractal 2006 created some real volatility in price going forward as many investors tried to call a top prematurely. You really can’t blame investors for wanting to take huge profits after riding Silver for such a big move. If we get a similar type of topping pattern as the 2006 period, we will likely see Silver trade up to around the $58 level into mid-year. The fractal target off of the 1970’s fractal chart remains at $52.8, but in this historic PM Bull, price targets could easily be higher.

Notice the similarity of the TA Indicators on the chart that I had circled back when I originally introduced this chart of Fractal Silver. The developing comparisons of the TA Indicators to Price, compared to 2006, are uncanny. On our site we will be using the timing off of fractal charts like these to guide and to monitor our investing endeavors.

Everybody is looking at this huge move in Silver and trying to gauge price movements going forward by looking at the recent past. In the recent past Silver was not moving up in a true Vth Wave rise-phase transition to Wave V, if you will. Some are already suggesting that Silver investors will get gored by this Bull in the immediate future, but investors may need to think a bit differently in a Vth wave sloped advance than in other price advances.

Sure, there will be some heavy selling once Silver has topped, and there will be some real fear as investors are scared to death about a 2008-like fall. 2008 was 2008, however, and it could be readily seen in the Fractal Charts of the 1970’s. Thus, I am suggesting that you look to the 70’s chart of Silver I provided in the original article to get some feel in relation to the fractal moves of Silver in that time period. The Fractal 70’s chart suggests that at this point in the cycle there will be huge, huge bids for Silver somewhere below price by big money salivating over the higher Vth Wave moves of Silver into the future.

Deepening Economic Crisis: Inflation, Rising Interest Rates, Surge in the Price of Gold and Silver


Economic recovery does not seem to be taking effect in spite of more massive expenditures by Congress and the Fed. The IMF says financial stability has improved, but then again their vision is almost always clouded. US tax revenues are not increasing in a meaningful way, manufacturing struggles to expand and Wall Street flourishes in a cascade of mega salaries and bonuses. In another six months the US will be three years what the government, the media and Wall Street call a deep recession. We call it an inflationary depression, which has existed for 26 months. After eight years of increasing money and credit, and the creation of a real estate bubble, the Fed has been fighting off asset destruction with ever more money and credit accompanied by debt deflation. Part of the Fed’s policy has been zero interest rates, which has helped Wall Street and banking and to a limited extent real estate, but has destroyed the purchasing power of retirees and has driven funds into speculation, which in many cases has ended in ever more losses and less buying power. 

The policy left conservative investors no place to turn to other than to join Wall Street and bankers in speculation, something they were not prepared for nor could they compete with. Borrowers have had a field day with virtually free money for which the result has been higher inflation and really major unemployment. You might call this the true Keynesian corporatist fascist model. This has left us with ongoing malinvestment, ridiculous illusions, which have led to the de-capitalizing of the US economy. In that process these interest free loans have given the big hitters the opportunity to enhance their fortunes at the expense of everyone else. 

These rates and QE2 at least for the moment have been so powerful that deflation is nowhere in sight, except perhaps in job creation. In fact net inflation has moved up to 9-1/2% and we believe this year it will attain 14%, as government eventually admits to 5-1/2%, as we saw three years ago. If you think we are wrong look at producer prices that are up almost 11% over the past six months. Government and mainline economists are not paying attention. Either the higher costs are passed on or the profits will disappear. Just like in years past, over and over again, the excessive expansionism of monetary and fiscal policy will produce excessive inflation, more inflation than the so-called experts are anticipating.

The bailout of financial institutions by American taxpayers, both in the US, UK and Europe, won’t be allowed to happen again. In the next go-around they will go bankrupt. Those in the US and other stock markets with the exception of gold and silver shares, those in bonds, derivatives and hedge funds, will be wiped out as well. Few will be spared.

A year from this June inflation should be near 20% and that is where panic will set in. The 10-year T-note should be yielding 5-1/4% to 5-1/2% and the 30-year fixed rate mortgage should be 6-1/2% to 6-3/4%. After that interest rates and inflation will more than double, as they did in the late 1970s.

An example that is easily understood is that due to foreclosure and lack of job creation, rents should increase 10% over the next 1-1/2 years. That is known as Homeowner’s Equivalent Rent, which is 23% of total inflation. We believe that is a conservative figure. We won’t deal with core inflation, because it is just a method of obscuring real inflation. That 10% increase would add 4% to net inflation, which is currently about 9-1/2%, not 1.9%, as your faithless government would have you believe. That would put real inflation at 5-1/2%, not to mention increased prices for fuel and food. That is why our estimates are 14% to 25% over that time frame. Don’t forget interest rates will be rising as well. This only includes QE and stimulus 1 & 2. If QE3, by that or some other euphemism occurs, which we believe has too, then 50% inflation and hyperinflation is attainable. Readers have to remember that even if oil prices stopped increasing at $120.00, and food prices stayed at 10% higher levels, it would still rob consumers of $300 billion in purchasing power. 

That would drop consumers as a part of GDP from 71% to 69% easily. That means GDP growth even with the Fed adding $2.5 trillion to the economy, would at best stay even and may reflect as low as a minus 6%. You have to get the feel of the dynamics of this. Raging inflation, plus perhaps hyperinflation, a falling economy and 30% to 40% unemployment, U6 was 37.6% at the top of the great depression and the birth/death ratio didn’t exist at that time. Presently wages are stagnant, and they have been so for three years. Wages will finally start to rise so you can add rising wages to the inflationary explosion. 

As this transpires we have the Middle East and North Africa, which are now a frightening further calamity waiting to happen. Any further violence there could take oil to $150.00 or higher. Will there be war with Iran? Perhaps and if that develops oil could escalate to $200 to $300 a barrel. Such developments would knock the foundation out from under the entire world, except for those fortunately producing oil. 

Another factor is the plight of municipalities and states in the US. We have seen a small reduction in employment in these sectors, but the biggest layoffs are yet to come, as well as more than 100 municipal bankruptcies. We will also see debt default by states in relation to their bonds and other debts. Some states, such as Illinois, New York and California could cease functioning. This is not a pretty picture.

Then we have the woeful situation in the UK and Europe, all beset with rising inflation as well. A sovereign debt crisis has been prevalent for months with Greece, Ireland, Portugal, Spain, Belgium and Italy. All are at different stages of failure and nothing has really been resolved. As we wrote months ago the cost of bailout assistance would be $4 trillion, and it was just recently that the Germans and other lenders realized that the bailout cost is insurmountable. The cost will easily bankrupt the solvent lenders. Then there are the banks, all of which are close to insolvency already, which are facing massive bond losses, which will put them out of business. These are the loans they made that they should have never made, from funds created out of thin air.

Iceland has rejected paying off British and Dutch depositors, who had funds in Icelandic banks, which went bankrupt. The depositors do not have a leg to stand on and the citizens of Iceland are correct in their refusal. It was the Icelandic bankers who screwed the depositors. 

Recently Finland’s voters rejected the bailout of Greece, Ireland and Portugal and who can blame them.
Wait until Greece goes into default, then things will get real interesting.

We normally do not editorialize regarding silver and gold. As you know we have recommended being long gold and silver shares, coins and bullion since June of 2000. Now that story is getting even better. Not only has gold and silver been a safe haven asset all those years, but is finally again becoming a shelter from inflation. The US, UK and Europe are in serious financial and economic trouble. Over the past 11 years, nine major country’s currencies on average have fallen more than 20% each year versus gold and silver. That is quite an extraordinary return and from our mail our subscribers are quite happy they followed our advice. Our run, including our market shorts, has simply been unbelievable. 

Silver prices are on a tear and as we write they have risen to $46.30. In spite of these price levels the mining industry is not increasing production in any meaningful way. About 70% of production comes as a by-product of other types of mining, such as copper. There are no new sizeable projects in the works, and thus it is expected that production could fall 5% annually for the next ten years. The easy finds have already been exploited and new large projects are harder to find. In fact, current mines have only been able to increase production by a paltry 2.5% or so. In 2009 Argentina was the only outstanding exception and that could be a one off occurrence.

As we write gold has broken out to $1,509.30 even as the “Plunge Protection Team” fights viciously to suppress both gold and silver prices. Despite the mantra on Wall Street and in government there is 9-1/2% inflation affecting the US economy and the professionals and the public are finally catching on. In spite of the greatest bull market in gold and silver history, they still do not get it. Less than 1% of Americans own gold and silver related assets.

The QE1 and 2 and stimulus 1 and 2 have done their damage. The inflationary results are in the pipeline. QE and stimulus being reflected this year and the results of QE2 and stimulus 2 next year. We believe we’ll see the results of QE3 the following year, 2013, but it will be called something else. A falling dollar and few buyers of US debt has again set the stage for the Fed taking down 80% or more of Treasury and Agency debt. If they do not do that the whole system will collapse. These programs are like booster rockets aiding an underlying positive fundamental condition for gold and silver. The flip side is the debasement and denigration of the US dollar. As an aside even though the ECB has just raised interest rates they and the UK will continue their own versions of QE, because if they don’t their economies will collapse. That will put even more inflation into the world financial system. 

As the possibility of QE3, or its equivalent, lurks in the wings the very solvency of America hangs in the balance. Those who have studied financial and economic history know that the course that is being followed is unworkable, and that certainly includes the staff at the Fed and the Treasury Department. In fact, Mr. Bernanke pointed out that in his and Mr. Baskins’ writings in 1988 after the market collapses of 1987. 

At the heart of America’s problems are the insolvency of many financial institutions and the failure of either the Fed or the Treasury to have them liquidated. What the banks have in mind is the liquidation of bad debt held in suspension over the next 50 years. Supposedly as conditions and profits increase part of those profits will be used to lower debt. The problem is that these corporations are bankrupt. There access in the creation of inside information allows them to produce illegal outsized profits, such as 90 days of propriety trading without a loss. We were traders for 25 years and know under normal legal circumstances that that is impossible. 

The, of course, there are the giant profits, really theft from other investors, that are used in part to offset previous losses and provide outsized salaries and bonuses to the crooks that run these banks and brokerage firms. These results are aided by the creation of money and credit and zero interest rates. The ability to borrow money created out of thin air at almost no cost. As a result the Fed now has a balance sheet of some $3 trillion loaded with Treasuries, Agencies, toxic waste and if they decide to create more money and credit to keep the government and the economy functioning for another year that figure will become $5.5 to $6 trillion. That is some monetization. There is unfortunately no other way for the Fed to do it, when at best they can only expect 20% to 30% of buyers for Treasuries, as the dollar falls in value. The situation is dire as the US dollar has just fallen 5% versus the Mexican peso, as the Mexican economy grows 4.5% a year, inflation is 3.7% and unemployment is 5%, and they haven’t used stimulus. 

What are we missing here? Nothing except the Fed and Treasury, as well as Congress and the President are out of their minds as were their predecessors. How bad is it when the largest bond fund in the world, PIMCO, not only sells all its US Treasuries and Agencies, because they see no value and then they proceed to short them? It’s certainly a sad day for the solvency of America. Who can blame PIMCO when government is projecting $1.6 trillion deficits as far as the eye can see. In addition, all the funds paid by Americans for Social Security and Medicare have been squandered by government. Now there is no way to pay the promised benefits. That is $100 trillion that has been stolen, or should we say misappropriated. It is so bad that the US government credit rating may soon be lowered. It was just 1-1/2 years ago we picked August 2011 as the possible time for a downgrading of that AAA credit rating. 

The number of states in serious financial trouble has now risen to 40 and unfortunately that number is still climbing.

US Dollar DX Index Very Long Term Charts

By: Jesse

The DX Index I normally show is the continuous futures contract on the DX index. The front month is now June.
The Fed also publishes two other dollar indices: major currency index, and the broad currency index. The major currency index is essentially the basis for the Wall Street DX futures index.

I have included charts of both of these Fed dollar indices below.

“If those in charge of our society - politicians, corporate executives, and owners of press and television - can dominate our ideas, they will be secure in their power. They will not need soldiers patrolling the streets. We will control ourselves.”

Howard Zinn







APPARENTLY QE2 IS “DISAPPOINTING”…

by Cullen Roche

The mainstream media is beginning to size-up the results of QE2. And apparently it’s looking it was all a great big monetary non-event. This is what I said before QE2 even started, however, it looks like the damage has already been done. QE2 didn’t monetize anything. It didn’t cause the money supply to explode. It didn’t really do anything except cause a great deal of confusion and generate an enormous amount of speculation in financial markets that now appears to be contributing to turmoil and strife around the globe. But the misconceptions continue. This weekend the NY Times tells us tells us that QE2 was ineffective mainly because it wasn’t large enough:
“WASHINGTON — The Federal Reserve’s experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates.
But most Americans are not feeling the difference, in part because those benefits have been surprisingly small. The latest estimates from economists, in fact, suggest that the pace of recovery from the global financial crisis has flagged since November, when the Fed started buying $600 billion in Treasury securities to push private dollars into investments that create jobs.”
They’re right that QE2 has been a disappointment. And most certainly a monetary non-event, however, there is substantial evidence now showing that QE2′s one targeted goal – increasing inflation expectations – is working via the exact wrong channels by contributing to the surge in commodity prices. So while it’s been a monetary non-event it’s been a substantial economic event.

Where the NY Times and economists like Paul Krugman (who is now saying “told ya so” after supporting QE at much larger levels) get it woefully wrong is with regards to size. There has been a chorus of economists in recent weeks telling us that QE2′s results have been disappointing because it wasn’t large enough (they’re essentially backpedaling from previous assertions that QE2 would do something beneficial). And now that it’s becoming clear that QE2 didn’t contribute positively to economic growth these same economists are changing their tune to give the appearance that QE is not a flawed policy, but that it was merely implemented incorrectly. This is sheer nonsense.

When I first discussed QE last August and why it would not contribute positively to economic growth I described how QE was akin to an apple salesman who can’t sell enough apples. So, instead of altering price he merely alters the number of apples on the shelves. Altering reserve balances at banks is perfectly analogous. Giving the banks more reserves does nothing because banks are never reserve constrained. But now all of the experts are trying to convince us that QE just wasn’t tried hard enough! If only the apple salesman had put more apples on the shelves – then his sales would have improved! No, that’s not how monetary policy works. And as I’ve said for many many months now, this obsession with size is entirely misguided. QE2 isn’t about size. It is about price.

QE2 was destined to fail before it ever started. Not because it wasn’t large enough, but because rates can’t be controlled through size. They are controlled by targeting price. The Fed controls the short end of the curve by setting the rate. They do not come out at the FOMC meetings and declare that they will buy $XXXmm in reserves. They announce that the short rate is X.XX%.

With regards to QE2 the Fed has come out and said they are going to buy back a specific number of bonds. And the bond market has yawned at the Fed. In fact, the bond market has spat in their face. Long rates are higher by almost 100 bps since QE2 started and there is no evidence that QE2 is helping to spur the lending markets as the Fed might have hoped. Can you imagine if the Fed set the overnight rate at 0.25% and the market just ignored them and took short rates right up to 1.25%? The Fed would be mocked as a meaningless institution. But in the case of QE2 we make all sorts of excuses about size, real rates, etc in order to shield their impotence.

Had the Fed hoped to control long rates they should have come out and directly stated their target rate. They should have done exactly what they do at the short end – stand guard at that rate and challenge any and all speculators to move the rate. But my guess is they don’t want to do that because they are fearful it will be viewed as a mass monetization of debt (even though the Fed can do no such thing). That would spark a mass hysteria over inflation and could cause investors and speculators to pile into other assets and that might counteract the entire efforts of the Fed’s actions. Oh wait, that happened anyways.

The evidence is beginning to show that QE2 was a giant SNAFU. It was a misguided policy that was improperly implemented and entirely misinterpreted by the public (including 99% of all economists reporting on it). The US economy is in a worse position because of this policy. It’s time for the Fed to stop tinkering with experimental policies. And it’s not helpful when the same people who were wrong about this policy from the very beginning make excuses for the Fed that might only encourage them in the future. The US economy might look like a corpse, but that doesn’t mean it is ripe for Dr. Bernankenstein’s experiments….As I said 8 months ag0 – it’s time for Dr. Bernanke to put down the mallet and step away from the operating table.

See the original article >>

The value of the dollar: Five factors for investors

By Barry Ritholtz

To most investors, the value of the dollar is an abstraction; its fluctuations are mostly ignored. Any currency, the dollar included, must be viewed relative to other currencies. You work in, get paid with and consume goods using dollars. Without a frame of reference to analyze it, the fluctuations have little meaning. 

The time people seem to really notice is when they travel overseas and discover that it is not worth nearly as much as they expected. (“Forty dollars for a hamburger in London? Outrageous.”) As an investor, you may not be aware of what this ultimately means — to the economy, your investments and the nation. But it matters more than you realize — and it’s not just about pricey hamburgers.

To help you wrap your head around the value of a dollar, let’s look at five factors:
1The dollar matters a lot: The value of the greenback determines how competitive U.S. goods and services are on the world market. 

You can see this in the dollar’s impact on how much we sell overseas and what our imports cost. The U.S. economy exports almost $2 trillion of goods and services a year. Each month, we import more than $200 billion worth of stuff, creating a monthly trade deficit north of $45 billion

Many politicians talk about a strong dollar, but it’s mostly lip service. A weak dollar helps to create jobs by making U.S. products more price-competitive overseas. Indeed, many countries try to accomplish the same thing, creating a “beggar thy neighbor” policy. The global recession led to nearly every country in the world trying to export its way out of a slowdown. 

Warren Buffett has noted that “in the years since I was born, the dollar has depreciated 94 percent. It’s 16-for-1 in terms of inflation.” But, Buffett went on to point out, you earn 16 times as much as you used to. Costs are relative to your earning power, and to investors, what matters most is the earning power of companies that sell goods and services. 

2Inflation and the dollar: Inflation, Paul Volcker said, is the cruelest tax. The soft dollar has contributed to rising inflation since former Fed chair Alan Greenspan took rates down to 1 percent in the early 2000s. 

This is the price to be paid for making the dollar weaker to create those jobs. Commodities are priced in greenbacks. Most notably, food and oil are also dollar denominated. As the measuring stick (the dollar) gets smaller, commodity prices rise. When you see gas prices exceed $4 a gallon, and the costs of various foods rising, much of that is related to the dollar’s slide. 

Rising food prices and higher energy costs are felt most harshly by lower- and middle- income consumers and by retirees living on a fixed income. When the prices of these essential rise, it eats into their discretionary spending. 

Let’s not forget that metals are also priced in dollars — including gold. It is up 500 percent over the past decade, hitting $1,512 last week. This reflects a double concern: that the dollar is weakening, and that inflation is stirring.

3From 2001 to 2008, the dollar collapsed 41 percent: While that 94 percent drop in Buffett’s lifetime is substantial, the past decade saw a full-blown collapse. The buying power of the dollar was cut nearly in half from 2002 to 2008.  

That collapse was triggered by the ultra-low rates by the Treasury, and an (arguably) unpopular U.S. war in Iraq. The rates under Alan Greenspan kicked off a vicious circle of increased prices, low returns on bond investments and higher inflation. Price spikes in oil, gold, food and housing — everything priced in dollars — followed.

4The weak dollar policy forces money into riskier assets (and punishes savers): The Fed hasn’t explicitly stated that cash is trash, but it might well have. After Chairman Ben Bernanke’s op-ed in The Washington Post in November, many observers concluded that the Fed was trying to force cash out of hiding into the economy. 

Just as deflation encourages consumers to hold onto their money and wait for lower prices, inflation encourages consumers to spend their cash and beat the price increase. 

With rates low and the dollar’s value in decline, some have argued that the Fed is forcing money into more productive uses. In theory, that includes expanding businesses, hiring and making capital investments.

What has really happened? While there has been some business hiring, it has been sub-par — typical in a post-credit crisis recovery. But it has led to speculation in commodity and equity markets. Rising stock prices and soaring commodity prices are a function of the Fed blunting the dollar. 

5In the land of the blind . . . There are four major currency blocs — the dollar, the euro, the yen and the yuan. With so many factors against it, why would anyone want to own U.S. dollars? Because, well, it’s the least ugly currency of the lot. 

The Europeans are still not only dealing with an ongoing banking crisis. Portugal, Ireland, Italy, Greece and Spain all have solvency problems. Lacking their own currency, these nations cannot simply print their way out of debt. Thus, there is a small but real possibility that the European Union will not hold, and the euro will collapse. 

Japan is even worse. It was mired in a multi-decade slog, and then the earthquake/ tsunami/nuclear crisis rocked it back on its heels. 

That leaves China. Despite market reforms, it is still a totalitarian communist regime. Western nations are none too keen about making its currency the reserve of the world. 

To the dollar then. In the land of the blind, the one-eyed man is king.

Monetary Base, Dollar Swings

By Barry Ritholtz

I found these two charts rather fascinating: The first shows the overall increase in the Monetary base since 1990.

It was expanding for 18 years at a pretty good clip — then it exploded with the financial collapse in 2008. The 2nd chart shows swings in the dollar index since then.

All charts courtesy of The Chart Store
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