Thursday, May 19, 2011

Where Have All The Bulls Gone?

by Bespoke Investment Group

While business TV anchors are busy watching the LinkedIn (LNKD) IPO and wondering whether or not we are in the early stages of another bubble, individual investors are heading for the hills. In the latest sentiment survey from the American Association of Individual Investors (AAII), bullish sentiment dropped below 30% (26.7%) for the first time since August 2010 when the QE2 rally began. Even though the S&P 500 remains near its highs of the bull market, nearly all the bullish sentiment that was built up during the rally has now been given back. People like to say that the individual investor is always the last to get in and the first to get out. This time at least, the individual is making a quick exit. Will they be too early?

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Rise in Midwest farmland prices hits 32-year high


The rate of increase in Midwest farm values has hit a 32-year high, despite a rise in land for sale – and the rally does not look over yet.
Farmland prices in major agricultural states such as Illinois and Iowa soared 16%, year on year, in the first quarter of 2011, the Federal Reserve said.
The increase in the growth rate to a figure matched only once since 1979, in 2007, came despite a rise in the plots offered for sale, with the extra supplies mopped up in particular by farmers clamouring for extra land to cash in on elevated crop prices.
"The latest gains were spurred by higher commodity prices, which prompted farmers to buy additional land," the Federal Reserve's Chicago bank said.
Indeed, farmers "tended to outbid" investors in the land rush.
Market boom
The market conditions, with rising prices and volumes, would appear ideal for agents assisting in land sales, and relying on commissions for deals.
"The number of farms sold, the acreage sold, and the amount of farmland for sale grew," the Chicago Fed said.
And more than half bankers the Fed spoke to for its report forecast further gains ahead for land prices, with only 2% expecting a decline.
"The rapid increase in agricultural land values may not be over," the Fed said, adding that the increases had been reflected in rental prices, which had risen nearly in line, with 14%.
The rise in land prices was supported by an increase in funds for lending to farmers although, at just under 70%, the loan-to-deposit ratio – a key measure of the levels to which borrowers are extending themselves – fell to a 14-year low and well below levels ringing alarm bells in banks.
Indeed, farmers paid of a stack of borrowings taken out for purchases other than land, with demand for new ones falling to a 24-year low.
"Farmers had less need to seek bank loans," the Fed said.

Wheat rises again, amid caution over US estimates


US officials have been too optimistic in expectations for crop supplies given the array of weather setbacks, Rabobank has warned, lifting forecasts for prices of major crops as futures once again posted strong gains.
The bank's London analysts forecast inventories of all the major crops ending 2011-12 below estimates set last week by the US Department of Agriculture, whose data set the benchmarks on world markets.
However, they were particularly downbeat on prospects for cotton, for which it saw the important stocks-to-use ratio remaining at a historically-tight 36%, and wheat, for which it saw the USDA's world harvest forecast as nearly 12m tonnes too large.
The forecasts came as grain futures overcame early weakness to post further strong gains on Thursday, with Chicago wheat taking its gains in three sessions to $1 a bushel, and London and Paris contracts soaring more than 3%.
'Downgrades again'
Rabobank - noting the USDA's successions of cuts, totalling 24m tonnes, to hopes for the world wheat output in 2010-11 - said it expected "downgrades again this season" as wet weather holds back North American spring sowings, while winter wheat crops grapple with their worst crop ratings in 15 years.
And, besides the risk of further cuts to expectations for Europe's parched crops, the bank was also less upbeat on prospects for exports from the former Soviet Union – a sensitive point for markets given the region's price competitiveness.
"Production uncertainties aside, there remains significant policy risk clouding export forecasts for the Black Sea region," the bank said in a report, forecasting that no imminent return to "sizeable" Russian exports, and regional shipments of 23m tonnes in 2011-12, 3m tonnes below the USDA forecast.
The bank forecast Chicago wheat prices averaging $8.00 a bushel in the July-to-September quarter, easing to $7.50 a bushel in the first three months of 2012.
And premiums for wheat traded in Kansas, Minneapolis "and even" Paris should be supported by the particular setbacks facing higher-protein wheat crops.
'Stocks not replenished'
For cotton, the report forecast a continued decline in prices, but said the descent would be slowed by weather worries for crops in the US, the top exporter.
Indeed, while cotton is on for a record harvest in 2011-12, Rabobank's estimate of 203.6m tonnes was 3.5m tonnes short of the USDA estimate, with the bank also more upbeat on consumption too.
"Even with a record crop, global stocks are not expected to be replenished to average levels due to growing demand and three deficit season".
New York cotton prices were forecast easing to 120.00 cents a pound, on a near-term lot basis, from the 156.56 cents a pound that current spot contract, for July delivery, stood at on Thursday.
Ukraine upgrade
In other market news, Ukraine's deputy agriculture minister, Mykola Bezugly, forecast the country's grains harvest coming in "significantly higher" than 45m tonnes.
The farm ministry last month raised its harvest estimate to "up to" 45m tonnes, from 42m-43m tonnes.
And the United Arab Emirates bought 40,000 tonnes of wheat from Pakistan, which is seen as becoming a competitor in particular against Australia for Asian and Middle Eastern trade.

Wheat prices soar as hopes dive for French harvest


Grain prices soared as analysts highlighted the drought damage to French wheat from drought with Strategie Grains cutting its harvest estimate by 1m tonnes - and Agritel forecasting a crop more than 3m tonnes lower still.
Agritel also warned of a sharp drop in France's exports, leaving the country on course to lose second rank among world wheat exporters.
Wheat prices soared by more than 3% in London, and by 5% in Chicago in the US, where growers are also suffering adverse weather, with too little moisture in hard red winter wheat areas, and too much further north where farmers are trying to catch up on spring plantings.
Concerns have also grown for Russia suffering what would be, for some parts, a third successive summer drought.
Weakened forecasts
Strategie Grains analysts ditched expectations of a rise in French soft wheat production this year, despite a rise in sowings, saying dry weather had cut its potential to less than 35m tonnes, compared with 35.6m tonnes in 2010.
Grain prices at 15:50 GMT
Chicago wheat: $8.07 a bushel, +5.7%
Chicago corn: $7.48, +3.9%
Kansas wheat: $9.28 a bushel, +3.8%
Minneapolis wheat: $9.78 a bushel, +4.4%
London wheat: £188.00 a tonne, +4.2%
Paris wheat: E239.00 a tonne, +3.2%
Prices for July contracts on US exchanges, and November lots in Europe
The estimate is in line with a forecast from farm adviser Offre et Demande Agricole. Coceral, the lobby group estimated the harvest at 36.4m tonnes in March, before drought bit.
However, analysts at Agritel warned that even Strategie Grain's downgrade may not be enough, pegging the crop, in their first forecast, at 31.7m tonnes, representing a decline of 11.5% on last year's harvest.
Hot and dry
Agritel, which like rival Strategie Grains is based in Paris, said that its forecast reflected a cut in 13.0% drop in yield prospects to 6.31 tonnes per hectare, the lowest for at least six years, a "direct consequence of a lack of rain during the past three months".
France has imposed limits on water restrictions in 28 out of 96 of its administrative regions because of the lack of rainfall, which last month amounted to only 29% of the average for 1971-2000, according to government data.
Both analysis groups warned that they may revise their figures lower if rain is not forthcoming, with Strategie Grains flagging "high temperatures expected for the weekend".
US-based meteorological group flagged late on Tuesday that forecasts for France and Germany had turned "very dry" for the six-to-10 day period, but with "significant rains" likely in western and central France in the 11-to-15 day outlook.
Export impact
Agritel added that France's drop in production would be reflected its exports, cutting potential by some 6m tonnes.
Such decline would demote France significantly in the world export league, in which it is set to finish second in 2010-11, behind the US, following poor Black Sea and Canadian crops.
However, the group downplayed the impact on international grain prices of France's downgraded export potential, given the rebound in shipments expected from the former Soviet Union.
"This drop in French supplies could be compensated by the likely return of Russia and Ukraine on the export market," Agritel said.

Precious metals fundamentals deteriorating: Natixis

by Commodity Online

The potential for higher interest rates folloiwng the recent ECB hike in rates and possibility of ending of QE2 in USA would strengthen the dollar and raise the opportunity cost of holding a low-yieding asset such as gold resulting in weakening of precious metals prices, according to Natixis Commodity Markets (NCM) Metals Review Q2 20l1.

The bottom line is that one of the key drivers behind the rapid expansion of high powered money may be coming to an end, NCM Metals Review said. The underlying fundamentals for the precious metals are deteriorating. A sustained period of high and rising prices has eventually filtered through to higher supply. The same factors have also had an adverse impact on price sensitive sectors such as the jewellery market.

As such, the surplus for investors to absorb has increased. "The ETF disinvestment of early 2011 may have finished, but there has been very little fresh buying and we believe that the majority of institutional interest is now in place. Some investors have already started reducing their positions, either on ETFs or in the OTC market. Once we reach the point at which investment demand is no longer able to absorb the surplus, a case can be made for a downturn in gold prices."

NCM has projected an average annual gold price of $1,360/oz in 2011. With the prop of investment inflows potentially much reduced in 2012, there is scope for gold prices to drop further, and has forecast an average price of $1,140/oz. This implies a move towards, or perhaps below, $1,000/oz at some stage during this period.

Silver prices have been exceptionally volatile in recent time having spiked to almost $50/oz in early-May, prices corrected by 30% in just six trading sessions. With the combined effects of squeezes, producer hedging and abrupt changes in investor sentiment, it is hard to know whether the recent run up in prices is over yet, or whether the sharp fall in silver prices represents the beginnings of a more significant correction, NCM said.

"With the recent decline in other commodity prices such as crude oil (including a $12/bbl one-day fall) we would be tempted to see the recent price action as the beginning of a more protracted correction. With gold also expected to correct during the middle part of this year, we are looking for silver to continue its recent decline below $35/oz. Support at $30 should hold in the near-term, and we would expect an average price of between $31 and $32/oz for the year as a whole."

NCM continues to be constructive towards the outlook for palladium's fundamentals, with the market almost certain to generate another deficit this year. On the supply side, sales from Russian stockpiles may not last much longer. "Coupled with investor expectations remaining positive towards industrial commodities, we feel that prices should remain resilient over the rest of the year."

For platinum the picture is less rosy. The backdrop of structural oversupply means that the metal will continue to rely on investors absorbing excess production. "As far as investors are concerned, we were a little surprised to see such strong support emerge at $1,700/oz during the recent correction, but sentiment towards both main PGMs appears to be positive, and as such we have maintained our projections for 2011 average prices to $1,750/oz for platinum and $800/oz for palladium. Looking further ahead, we continue to expect palladium prices to fare better than platinum, the former maintaining its price gains and the latter receding somewhat, resulting in projected 2012 average prices of $875 and $1,800/oz respectively," NCM Metals Review added.

The Federal Debt Default Tornado Is Coming, Prepare Your Storm Shelter

Sometimes we need a hole to crawl into.

I recently spoke at a conference sponsored by a small rural church in Alabama. Several of the families had been in the path of one of the tornadoes that swept through the state. One of the families had a storm shelter/basement. Several nearby families did not. So, they ran for the house of the family that did.

When they all emerged, the house above them was gone. Yet the houses of the other families were still standing.

The family with the shelter has nine children. Their shelter had provided a safety zone for other families. Yet, after the tornado had moved on, the family with the shelter turned out to be the primary victim. 

Another family in a different part of the county was also hit by a tornado. The family had 13 children. They had no storm shelter. The walls of the house collapsed. The father was lying on top of a child. Some of the falling debris killed him. No one else died.

The church immediately set up a fund for the victims. The members pulled together. They did not seek FEMA aid.

One of the members wants to build a new home across the street from the church. The property has a high water table. It is not feasible to construct a basement shelter. So, he will have a safety room constructed, one reinforced with re-bar. 

We take precautions, but we cannot know how events will sort out winners from losers, survivors from the dead. The best we can do is to recognize that disasters can hit, and that precautions taken in advance are wise. Precautions can reduce the impact of disasters, but they cannot prevent them.

When we see a crisis coming, we spend extra money to make preparations. We reallocate our budgets. The more likely the crisis and the more devastating its results, the more we should allocate.

This strategy is not what the U.S. government adopts. It spends enormous sums on preparing for crises that are unlikely to occur. Think of our fleet of aircraft carriers. What nation is likely to go to war with us by means of aircraft carriers? 

Our problem today is that the most obvious source of a major crisis today is the debt structure of Western governments, central banks, and commercial banks. Because governments are the problem, there will not be a solution provided by politicians. The same is true of central banks.

There comes a time to start looking for a storm shelter.


When I grew up in Southern California in the 1950s, public elementary schools had an occasional drill for an atomic attack. It was called duck and cover. The drills would have been useless in an atomic attack. First, the infrastructure of society would have been blown away: power lines, highways, food-delivery systems, water lines. Second, the vertical protection of a school desk would have done little to protect us against the horizontal destruction of imploding windows. Glass shards would have sliced through us like knives.

Rather than construct a blast shelter system, the government spent $13,000 on a civil defense film, "Duck and Cover," starring Bert the Turtle. I have posted it here.

This film is a symbol of crisis and response management at the Federal level. The government sees a crisis coming and, rather than dealing with it in the early stages, when something might actually forestall it, resorts to public relations. It talks about the crisis. It appoints committees to write reports on it. There may even be a task force created to solve it. A task force is a committee filled with nationally respected figures, who hire a staff, meet a few times, and issues a report. No one pays any attention. No one is expected to pay any attention. All of this is a kind of kabuki dance. 

Only when a threat is manufactured by the government as a way to create a massive new bureaucratic structure does Congress implement expensive solutions. If the public does not respond to the announced crisis by way of support for major expenditures, the crisis gets shelved.

A disaster drill is a substitute for solving the problem. As long as the voters will accept the drill as a legitimate substitute for a solution, the drills will continue.


The worst crisis from the government's point of view is the national debt crisis. It leads to calls for reduced government spending. For this crisis, the government has this well-orchestrated response: 

1. An admission that it is real, but not imminent
2. A promise to deal with it later
3. A call to spend more now to spend less later
4. Kabuki theater

This week, the issue of the U.S. government's debt ceiling comes up for discussion in Congress. The Secretary of the Treasury has offered a dire forecast. There will be a double-dip recession unless Congress votes to raise the debt ceiling once again. Congress does this every year, but this year there is pressure from new House members not to raise the ceiling. Meanwhile, the government is in the middle of a $1.65 trillion on-budget deficit. Like a tornado, the deficit will hit the political will of Congress. There is no basement storm shelter. There is no safe room.

Congress's will to resist will be flattened, as it is every year. Usually, this vote has been pro forma. The media may mention it, but not as a prime-time story. It is always assumed that Congress will rubber stamp the proposed increase, in order to avoid a partial shutdown of the government – maybe 10% of operations. For Congress, this is regarded as a level-5 tornado, not a squall.

The debt limit will be reached this week. Geithner says that he can juggle accounts until August, but at that point, the government will have to default – the big D.

Speaker of the House Boehner has said that there will be a hike in the debt ceiling, but it will be a very special kind of increase. He said on the CBS Sunday morning news show, "Face the Nation," that "we're going to do it in a way that addresses America's long-term fiscal challenges." (Whenever I see a reference to "Face the Nation," I think of the "Grin and Bear It" cartoon strip, which frequently has Senator Snort appearing on "Faze the Nation.")

In a previously recorded segment of the show, President Obama invoked what has become a familiar refrain: the recurrence of the 2008 crisis. If investors ever "thought the full faith and credit of the U.S. was not being backed up, if they thought we might renege on our IOUs, it could unravel the entire financial system. We could have a worse recession than we've already had."

Of course, neither Boehner nor Obama mentioned the possibility of cutting Federal spending in order to balance the budget this year and thereby avoid having to raise the debt ceiling ever again. Such a strategy is too radical. The proposed official solution is to raise the ceiling again, and to promise that this will not always be necessary, because economic growth will raise tax revenues One of These Days, Real Soon Now. The budget will be balanced. The recession will not arrive. They promise.

This year is different. The discussion is front-page, prime-time news. This is because a handful of first-term Congressional Republicans in the House are making noises about cutting spending in order to reduce the size of the increase. They don't have the votes, as we will see. These Congressmen say publicly that they see what is economically necessary, but economics has little influence in Congress. The majority of the members think they can kick the can down the road for another year. In 2012, they will all campaign on responsible spending. The operational definition of "responsible spending" never changes: "kick the can again."


In his interview in front of an audience, President Obama warned about the consequences of a default by the U.S. government. It could unravel the worldwide economic recovery. You can see the video here.

He is correct. If the Federal government ever stops paying interest on its debt, the repercussions in the financial markets would be severe. It would be worse than the crisis in the fall of 2008.

The problem we face is this: with every increase in the Federal debt ceiling, the likelihood of default increases. The politicians' solution to the threat of default is to delay the default.

The government is trapped. It really does face the prospects of default if the debt ceiling is not raised. The alternative is to cut spending drastically before August. But that would be a form of default. Certain groups that have been promised largesse from the Federal government would find that the promises were not binding.

The problem is now selective default. The Congress and the White House always agree to defer any form of default. This is why we can be sure that selective default is inevitable. The deficit numbers do not allow the government to escape the increase in the debt ceiling.

We know from decades of experience that selective defaults are not politically acceptable. So, the deficit keeps growing. The debt ceiling keeps getting raised. This is done in the name of default-avoidance.

The battle over the debt ceiling is a sham. If Congress cannot legislate spending cuts that will balance the budget, then there is no possibility that it will put a cap on total expenditures by means of a debt ceiling. There was no significant reduction in the deficit earlier this year. The deficit in fact rose compared to last year's forecast. 

This is why the debate over the deficit is American kabuki theater. It is a way to score debate points for next year's elections. Candidates will be looking for published statements of incumbents' opinion on the debt ceiling. Everyone in Congress wants to position himself or herself as taking the responsible path to national prosperity.

The problem they face is this: to cut the deficit specifically is to alienate voting blocs that are dependent on transfer payments from the Federal government. They refuse to make specific cuts for this reason.

Each political party is more afraid of the alienation of specific voting blocs than it is with the general threat of the debt ceiling as a political issue. So, they do not specify what must be cut. Therefore, nothing will be cut.

An interviewer who wants to sink a candidate asks him to identify what programs he recommends cutting. The candidate mumbles. 

Boehner said that everything should be on the table except raising taxes. This plays well to conservative voters. But where is this table? Whenever the debate over the annual budget gets laid on the table, the specific cuts are not made. 

Boehner said we must now look at "the big picture." Indeed, we should. But Congress never does. 

Congressmen look at the small picture: the swing voters in their districts. These voters can usually make or break a re-election campaign. So, the Congressman seeks to retain the swing voters who elected him two years earlier while not losing his core constituency. He does not want voters to defect to his rival. So, he dares not propose specific cuts. Specific cuts alienate specific swing voters.

He said that Congress must not kick the can. But he announced that it must kick the can on the debt ceiling this time. When a politician says that Congress must not kick the can, but then says it must kick the can this time, so that it won't have to kick it next time, he is saying that Congress will kick the can.

This never changes. Politicians can call for deficit cuts in general. But there are never cuts in general. There are only cuts in particular. These do not get made.


A tornado is like specific budget cuts. No one knows in advance whose house will be blown away.

Some families buy houses with storm shelters. But hardly anyone ever builds a home. 

Most families are barely getting buy. They spend as much as they bring in after taxes and mortgage. They do not make specific cuts in spending deep enough to build up a reserve.

So, they do not prepare storm shelters. They kick the can. They imitate Congress.

Do you need gold coins? Yes. Do you need a back-up plan if you lose your job? Yes. Do you need a network of people who might be able to find you a job? Yes. Do you need a side business? Probably. Do you need skills that can be transferred to a new line of work? Yes. Do you need a plan to make sure you stay on the short list of "must not fire"? Yes. 

Are you actively building your financial storm shelter?


Congressmen talk about the need to reduce the deficit. Talk is cheap.
Voters talk about the need to clean house in Congress. But it never happens. Remember Arnold Schwarzenegger and his broom? He has departed. I don't know where the broom is. The fiscal Augean stables remain.

When the tornado of selective default comes, you need to be in your storm shelter. Maybe your house will be blown away. Maybe not. But don't be inside it when you find out.

The Invisible Stock Bubble; Crash and Bear Market Ahead to S&P 400

As measured by current earnings, the stock market does not seem hugely overpriced. The question is will those earnings hold up?

SmartMoney associate editor Jack Hough addresses the question in The Invisible Stock Bubble

A new stock bubble might now be in the making, but this time the signs are less obvious. U.S. stocks, despite having racked up a decade worth of typical gains in the 26 months after their recessionary low, do not look expensive. The S&P 500 trades at 15.3 times trailing earnings, only a smidgen above its historic average of 14.5.

Those numbers might be luring investors toward a cliff, however. History suggests today's corporate earnings are unsustainably high relative to the size of the economy. The real price-to-earnings ratio, based on a more normal level of earnings, is well over 20.

To see why, consider a broad measure of America's prosperity called national income. It consists of corporate profits, worker wages, sole proprietor income and more. Corporations and workers compete against each other for income but also rely on each other for success. When profits and wages grow in tandem, the result is healthy economic expansion. When one grabs too large a slice of the nation's income pie, it usually signals a downturn waiting to happen.

For example, corporations since 1929 have collected an average of 6.4 cents per dollar of national income as after-tax profits. In 1966 corporate profits swelled to 8.3 cents per dollar of national income; they then fell 19% by the end of the decade. In 1997 they were 8.6 cents per dollar of national income; by the end of that decade they were down 13%.

Last year corporate profits reached 9.4 cents per dollar of national income. That's 47% too high by historic standards. If earnings were to shrink to their historic average, the aforementioned P-E ratio of 15.3 for the broad stock market would rise to nearly 23. The result would almost surely be a plunge in share prices.

After-Tax Corporate Taxes as % of Gross National Income

Corporate profits have commanded this large a share of national income only twice before: in 1929 and 2006. Those years preceded the past century's worst two financial collapses.
Normalized PE Ratios
SmartMoney also mentions (but not by name) "Normalized PE Ratios" something I have talked about several times recently.

Using a 10-year average of PE ratios, Robert Shiller pegs the normalized PE ratio of the S&P 500 at 24, an excessively rich valuation.

PE Compression

The article failed to mention the biggest driver of price, "PE Compression and Expansion."

Huge moves in the stock market come not from earnings, but rather from prices investors are willing to pay for those earnings. That was the case in 1929, 2000, and 2007. It was also true at bear market bottoms in numerous years where PE ratios collapsed to under 10.

For further discussion of Normalized PE ratios and Earnings compression, please see Negative Annualized Stock Market Returns for the Next 10 Years or Longer? It's Far More Likely Than You Think

As a follow-up post, please see Anatomy of Bubbles; Negative Returns for a Decade Revisited; Is Gold in a Bubble?

Russell Napier sees S&P Drop to 400

Finally, inquiring minds may wish to consider the video Long View: Historian sees S&P fall to 400.

Russell Napier warns the real bear market in the S&P has yet to come and that could push the S&P 500 index down to 400. The trigger for this event is related to emerging market debt yields. Click on link to play the video.

I do not have a target in mind as this setup can play out in a crash, in a long sideways move where earnings catch up to valuations, in a slow drift lower over many years, or a mini-crash followed by a lengthy sideways correction.

See the original article >>

U.S. Treasury Bond Market Forecast, Inflation Is In The Heir

Ah, it is May, the snow has recessed to uncover nature waiting to beam with green radiance. Spring is in the air. On the same note, financial shenanigans of yesteryear are finally starting to come home to show inflation...inflation is in the air just as noticeably. This article is going to focus on "Inflation is in the Heir". Barrack Obama is a very intelligence speaker, intelligent and possess charisma. However, they could have Mickey Mouse or the Pope as the US President, or any other nation for that matter and there is nothing that can be done to prevent the coming inflationary is all part of a very long economic cycle.

Back in 1913 after intense hard times and the Federal Reserve was created by a weekend getaway to Jekyll Island. And that is a brief history of the Federal Reserve. Implementation of the Federal Reserve started the erosion process of gold-backed currencies. Gradual bastardization of this system lead to speculative fervour that aided in creating the crash of 1929. During this time was when Kenysian economics was born. In order to devalue the US dollar, Roosevelt ordered confiscation of gold from all US citizens at $20/ounce. After all the gold was taken, the price was raised to $35/ounce, thereby boosting the amount of money in the US government coffers.

Near the end of World War II, plans were created for trying to slowly rebuild global countries around the world and hence, the Bretton Woods System was created. Gold was fixed at $35/ounce until 1971 when silent inflation was pressing and France was demanding the US to repay their debt in gold. Because of this push, Nixon took the US dollar of f the gold standard and was allowed to trade freely. With this move the US was able to print money freely to cover bills without having to work for it. This policy soon swept the globe and inflation ran rampant until 1979 when gold closed briefly above $850/ounce.

Subsequent to the commodity top, all cycles that top must bottom and it took over 30 years for interest rates to bottom. Inflation in North America was deferred by the US dollar being stronger than most currencies, which allowed imported goods to be purchased cheaper. While North Americans and Europeans bought cheap goods from China and Asia, they saved and slowly accumulated money. Now, as with any insight into history, those that save will have power. Workers in China have demanded more money and since the Chinese Yuan is linked to the US dollar, any increases in price due to monetary expansion in the US will be passed onto the Chinese populous. When China removes its peg to the USD and trades freely, it will rise in value, which will in turn make things cheaper for them as a nation. The long-term losers will be Europe and North America as prices will rise substantially. This is what has been talked about for years as "Sooner or later the chickens will come home to roost".

Silent inflation has been building for 30 years and now is really going to hit everyone hard. Push inflation is not possible, because if unions demand too much money, companies will shut down or go somewhere else. Interest rates are low right now, but what will push them will be people demanding more return for their money due to increases in defaults. Rates are likely to rise over the next 8-10 years...the start of rising rates is at its infancy. When interest rates rise, there is a rush into tangible assets. With the introduction of tax-free savings accounts in Canada, things like this are the best ways to participate in the coming rise in gold and silver prices.

The above is a very condensed version of history from 1913 till present and how we got here. This is a very long economic cycle. Cycles are in nature, just like the Earth rotates around the sun or the moon goes around the Earth. In order to pass through this difficult period of time, we must allow the time to pass. Intervention into trying and stopping the cycle or stretching it out will only make matters worse.

The accompanying graphs for this article examine the 10 Year US Treasury Index and describe the likely trend to occur over the next 8-10 years. I cover the US dollar weekly and will leave analysis and discussion about it for another day.

10 Year US Treasury Index

The daily chart of the TNX is shown below, with all three lower Bollinger bands beneath the index, suggestive that a bottom is being put in place. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K beneath the %D in all three instances. The %K in stochastic 1 appears set to cross above the %D, however, the %K in stochastic 2 is at least 2-3 weeks away from doing this. An oscillator function new to Stockcharts was included in this graph to illustrate the time taken for wave 1 of the Elliott Wave count. Wave 2 is nearing completion, but based upon stochastics, a bottom is not due for another 2-3 weeks. What is important to recognize that a change in trend since November 2010 has been underway. Waves 3, 4 and 5 have yet to occur and is likely to complete sometime between June and December 2012, with an expected top to lie somewhere between 5.2-5.4%. Wave (2) down after wave (1) completes will take 18-24 months to complete, which will coincide with a sharp downward move in the broad stock market indices (A 40-50% retracement from highs of 1600-1650 expected in late to mid 2012).

Figure 1

The weekly chart of the TNX is shown below, with lower 34 and MA Bollinger bands well beneath the index, suggestive that the minimum 2-3 weeks for a bottom based upon Figure 1 could become extended for 2-3 months. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K beneath the %D in 1 and above the %D in 2 and 3. Based upon positioning of the %K in stochastics 1 and 2, wave 2 as per Figure 1 might not be complete for another 2-3 months. This sort of time frame correlates well with the expected termination point of wave (1) in the latter part of 2012/early 2013. The important item to take home from this observation is that if wave (1) takes 24-26 months, wave (2) will take at least as long, maybe longer. Then, waves (3), (4) and (5) will have yet to form which takes this impulsive bull market into 2021-2022 time frame. As I have stated before, the bull market in precious metals is just beginning. Rising interest rates spur a demand for investments in tangible items, since this is the only way to preserve capital. When the top does arrive, those that time things well by exiting and purchasing other stocks at depressed levels will stand to make fortunes.

Figure 2

The monthly chart of the TNX is shown below, with lower Bollinger bands beneath the index, suggestive that a bottom was put in place back in 2009. Full stochastics 1, 2 and 3 are shown below in order of descent, with the %K beneath the %D in 1 and above the %D in 2 and 3. Notice how the %K in stochastic 1 curled up...this suggests the TNX is in a multi-year uptrend. Rising interest rates basically imply that bank accounts are not the place to store money as purchasing power will erode on a yearly basis, compounding. So, the only really smart things to do with money over the coming years is to pay down debt, buy gold and silver bullion or equities in favourable resource companies...tangible asset allocation is the only way to really preserve capital and have it grow over the coming years. Bond investors will get smashed when the trend defined in these Figures becomes "visible" to the street. This will start a rush into gold and silver bullion which is what will make stocks go to the moon. If stocks behave like 1980-1986, there is no telling how high prices could go. The general public is still not on board at all, so this speaks volumes.

Figure 3

The long-term Elliott Wave count of the TNX is shown below, with wave 2 underway at present. The decline from 1980 till 2010 was 30 years, which has yet to confirm a breakout of the downtrend line. When this happens later in 2012 and then back and fills the breakout in wave (2) from 2013-2014, expect everyone to be calling deflation...this will be anything from the truth. This will represent a "pause" or "breath" in the cycle pattern before it breaks to new highs in 2014 and beyond. I have wrote numerous articles in the past, "Diatribes of a Deflationist" etc. so there is no point rehashing explanations of the past. The ability for governments to control currency growth by printing money and forcing it into circulation by offering to banks, who in turn further inflate the money base through fractional reserve practices has been the main way money has entered the system. Governments in countries like the US, Canada, Australia etc. are becoming more and more government-based economies, which is how money is being syphoned into the economy...make work projects, more jobs etc. etc. The chickens are going to come home and roost for every nation...just think about how expensive things for the US will become once China is forced (due to internal inflation problems) to decouple their Yuan from the US dollar and allow it to trade freely.

Figure 4

That is all for today. Back tomorrow with an update of the USD index and 3 currencies. Have a great day.
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The Coming Great Inflation

The table displayed immediately below is likely to surprise even our most-jaded readers. It shows the astronomical increase in cash prices for well-known food commodities over the past 12 months. With inarguable exactness, it contradicts the nearly constant prattle in the mainstream press that inflation is under control, or that it is peaking and likely to come under control sometime soon. Some items on the list have doubled -- even tripled -- in price over the past year. Others have risen at mere double-digit rates. 

These numbers signal a potentially serious inflation shock for the American consumer down the road as wholesale food inflation feeds through to consumer prices. It should be noted too that these are the rates of increase AFTER the highly publicized corrections during the first two weeks of May.
Cash Prices Food Commodities
(Prices for actual physical commodiities, not futures)
5/11/11 Year Ago Change
Grains and feeds
Barley, top-quality Mnpls; $ per 6.2 3.15 + 96.8%
Bran, wheat middlings, Kn. City; $ per ton 178 43 +314.0%
Corn, No. 2 yellow. Cent. Ill. 6.605 3.48 +89.8%
Corn gluten feed, Midwest, ton 150.42 51.59 +191.6%
Cottonseed meal, ton 268 175 +53.1%
Hominy feed, Cent. Ill. Ton 205 77 +166.2%
Meat-bonemeal, 50% pro Mnpls ton 440 280 +57.1%
Oats, No. 2 milling, Mnpls; $ per 3.42 1.955 +74.9%
Sorghum, (Milo) No. 2 Gulf cwt 11.275 6.76 +66.8%
Soybean Meal, Cent. Ill., rail, ton 48% 335.6 291.9 +15.0%
Soybeans, No. 1 yellow Illinois 13.14 9.37 +40.2%
Wheat, Spring 14%-pro Mnpls; $ 9 4.4225 +103.5%
Wheat, No. 2 soft red, St.Louis, shel 7.72 4.81 +60.5%
Wheat, hard, KC 7.575 4.025 +88.2%
Wheat, No. 1 soft white, del Portland, Ore 12.1025 6.2825 +92.6%

Beef choice 1-3,600-900 lbs. 166.68 154.05 +8.2%
Beef select 1-3,600-900 lbs. 160.27 150.17 +6.7%
Broilers, dressed 'A'; per lb. 0.865 0.865 0.0%
Broilers, 12-city comp weighted avg 0.8458 0.8527 -0.8%
Butter, AA Chicago, lb. 2.05 1.605 +27.7%
Cheddar cheese, barrels, Chicago lb. 165.25 140.75 +17.4%
Milk, Nonfat dry, Chicago 164 130 +26.2%
Cocoa, Ivory Coast, $ per metric ton 3637 3566 +2.0%
Coffee, Brazilian, Comp. 2.7637 1.2962 +113.2%
Coffee, Colombian, NY lb. 3.0974 2.0139 +53.8%
Eggs, large white, Chicago dozen 0.885 0.595 +48.7%
Flour, hard winter Kansas City cwt 22.55 13.7 +64.6%
Hogs, Iowa-South Minnesota avg. cwt 88.04 82.49 +6.7%
Pork loins, 13-19 lbs, Mid-US lb 1.415 1.54 -8.1%
Steers, feeder, Oklahoma City, avg cwt 142.13 128.19 +10.9%
Sugar, cane, raw, world, lb. fob 26.31 19.54 +34.6%

Data Source: Wall Steet Jounal Market Data Center

The Bureau of Labor Statistics likes to underplay the role of food and energy in the cost of living and emphasize instead the less volatile core inflation rate. "If you don't eat or drive, inflation's no problem," the New York Times once quipped in a headline. For the typical American, though, the price of food is unquestionably a major issue, as well as a real-life indicator for prices across the spectrum of goods and services. In fact, for most, if food prices are rising that is the very definition of inflation and, as our table illustrates, food prices have risen with a vengeance.


I Can't Eat an i-Pad

William Dudley, president of the New York Federal Reserve, rationalized at a townhall meeting in Queens recently that "you can buy an iPad2 that costs the same as an iPad1 that is twice as powerful. You have to look at the prices of all things." A voice quickly came from the back of the room: "I can't eat an iPad!" Newsweek magazine thought enough of the retort to label it "the line that launched the Great Inflation of the 2010s."

Inflationary concerns go beyond that of the citizenry to those who manage vast capital pools for governments and large institutions. Last month, Mexico's central bank surprised gold market experts with the announcement of its acquisition of 93 tonnes of the metal. The central bank's Governor, Agustin Carstens, denied publicly that the purchase reflected a lack of confidence in the U.S. dollar. At the same time, it is difficult to explain the motivation as anything else. Interestingly, Carstens was quoted by Bloomberg in mid-April that rising commodity prices had "caused uncertainty about the inflation outlook in Mexico" and "complicated the bank's monetary policy." Even as Carstens spoke, Mexico was in the process of mitigating those concerns with an unprecedented gold purchase -- the third largest over the past decade.
Similarly, the University of Texas stunned the market with its announcement of a $1 billion physical gold purchase. Kyle Bass, the hedge fund manager and board member who recommended the UT purchase, said, "Central banks are printing more money than they ever have, so what's the value of money in terms of purchases of goods and services. I look at gold as just another currency that they can't print any more of."


Adding inflation to systemic risk, gold's best days may still lie ahead

Since 2001, gold's bull market has been driven principally by systemic risks, not by inflation -- a circumstance that should give us all pause. Add rampant inflation to the mix, and you have the impetus for even stronger demand in the months and years to come. Mexico and the University of Texas are not alone in hoping to shore up their balance sheets with gold. The list in fact grows longer by the day.

Robin Griffiths is the highly-regarded City of London chartist who plies his trade at Cazenove, reportedly stock broker to the Queen. Citing "loose monetary policy," "money printing" and Fed chairman Ben Bernanke's "trashing of the dollar" he believes gold's bull market could go into hyperdrive. "I think it will all be over by 2015," he says, "a lot of it depends on how aggressively paper monies get printed from here on in. I think $3,000 is an absolute minimum target. I can believe in targets certainly above $5,000 and it's theoretically possible to go to $12,000. . ." 

Those targets should be taken with a grain of salt as should the 2015 timeline, but it gives you an idea what some contemplate for the gold price in the face of an accelerated inflationary, or even hyperinflationary, assault on the dollar's value. Ultimately, what the parabolic increase in cash food commodities over the past year is telling us is that gold's best days may still lie ahead.

King Ibn Saud's 35,000 British Sovereigns Gold's historic undervaluation versus oil

The Wikileaks/Financial Times revelations on significant gold buying interest in the Middle East — notably Iran's central bank, Jordan's central bank and Qatar's sovereign wealth fund — brought to mind the story of Saudi Arabia's King Ibn Saud and his sale of oil concessions to the major oil companies. In payment he received 35,000 British Sovereigns — a coin many of you hold in your own sovereign wealth funds. The good king understood the difference between the value of gold and the value of a paper promise.

At the time (1933), the British Sovereign's value stood at $8.24 each, or $288,365 for the lot. The price of oil was about 85¢ a barrel, and a British Sovereign could buy about ten barrels.

Today those same Sovereigns would bring a little less than $12 million at melt value ($338.00 each) and a barrel of oil is selling for about $115. Thus, a British Sovereign can buy a little under three barrels of oil — a statistic which gives you an inkling of gold's current undervaluation.

For gold to buy the same amount of oil now that it did in 1933, the price would have to go to nearly $5000 per ounce — an interesting calculation for those who think gold is overvalued and in a bubble.

In the gold market where there's smoke, there's fire. If members within one class of investors — e.g., central banks, sovereign wealth funds or hedge funds — you can be assured that other members of that same group are similarly involved. Recent activity within the hedge fund industry with respect to gold is exemplary. It follows then that if Iran, Qatar and Jordan — themselves threatened by the popular Pan-Arabic uprisings — are acting on their interest in gold, can Saudi Arabia, the United Arab Emirates and Kuwait be far behind?
If so, they will join several nation-states and a bevy of hedge and sovereign wealth funds in the pursuit. The problem they will encounter is an old one. There simply is not enough physical gold available at any given point in time to satisfy the needs of any one of these major players, let alone all of them. All of this, of course, will resolve itself in the price for which the metal sells.

I note with interest that Barclays Bank — one of the five members of the London Gold Fix and an institution well-situated to experience first-hand the interest in physical metal — has predicted a top price for 2011 of $1620 per ounce. Predictions by other Fix members are equally bullish. Scotia-Mocatta predicts a high range of $1500 to $1600 with a possibility of a spike higher. Deutsche Bank is predicting $1511 per ounce for 2011 and $2000 per ounce for 2012. Both Societe General and HSBC, the two remaining members, are calling for a top-end price of $1550 per ounce. These bullion banks are in a better position than most to ascertain the sources of physical demand, and they know better than anyone the extent of global interest among key players. By the way Goldman Sachs, though not a member of the Fix, is still widely monitored for its opinion on gold. It has set a price objective of $1690 per ounce for 2011.

Short & Sweet

THE RECENT SHARP GOLD AND SILVER PRICE CORRECTIONS of early May caused a wave of purchases in India. In fact bullion dealers reported some of the best volumes this year. India accounts for roughly 20% of annual gold demand. Financial Times reported that "in Mumbai's bustling Zaveri market, the gold hub of India's wealthiest city, traders were suffering from no such jitters. Indeed, they were fiercely elbowing one another to grab as many shiny bars as possible last Friday amid expectations that falling prices would cause demand to soar." At USAGOLD, we talk about what we call the "India indicator." When there is profusion of callers with an Indian accent, we start looking for the market to put in a bottom.

BLOOMBERG REPORTS THAT "SALES OF GOLD COINS are on track for the best month in a year amid the worst commodities rout since 2008, a sign that bullion's longest bull market in nine decades has further to run, if history is a guide. The U.S. Mint sold 85,000 ounces of American Eagle coins since May 1 as the Standard & Poor's GSCI Index of 24 raw materials fell 9.9 percent. The last time sales reached that level, bullion rose 21 percent in the next year. Gold will advance 17 percent to a record $1,750 an ounce by Dec. 31 and keep gaining in 2012, the median estimate in a Bloomberg survey of 31 analysts, traders and investors shows."

AS WE GO TO PRESS, THE TREASURY DEPARTMENT REPORTS that the United States will exceed its $14.294 trillion debt limit by Monday, May 16, 2011. Default, if Congress fails to increase that ceiling, will occur in early August. 57% of Americans are opposed to raising the debt ceiling, according to the Gallup Poll. Fed chairman Ben Bernanke warns of grave consequences over the government's ability to borrow, including a spike in interest rates and "severe instability in the financial markets." 

HINDLE CAPITAL'S BEN DAVIES, an analyst with whom we find ourselves agreeing on a regular basis, says that it's not speculation driving gold and silver prices higher, but monetary debasement. Blaming speculators for rising commodity prices is like blaming the weatherman for the weather.

THE USAGOLD WEBSITE CONTINUES TO GROW by leaps and bounds. We recently were forced to go to a dedicated server to keep up with the traffic. Our mobile pages are leading the way. Smart phone users like the user-friendly live price page, and also frequent the news link offered there regularly.
WE HAVE ADDED A VIDEO VERSION of our Daily Market Report linked through our mobile page. Hosted by Jonathan Kosares, it provides an easy way for you to keep up with the issues and events driving the gold market on your smart phone.

JULIAN PHILLIPS (GOLD FORCASTER): "The Chinese mining sector is currently producing 340 tonnes of gold a year and rising. No doubt there is every encouragement from the State for this figure to rise. We believe that no matter how high it rises, little if any of that supply will reach the world's 'open' market in London. Even global gold production is not likely to rise significantly from the current level of around 2,500 tonnes. Therein lies a development that, in itself, will change global gold market dynamics."

TOCQUEVILLE GOLD FUND'S JOHN HATHAWAY on the recent corrections in gold and silver: "It's not a trend change. Just take a couple of weeks off and come back to it. The investment thesis is not at all in question here. It's just the dynamics of the market."

THE WALL STREET JOURNAL'S DAVED COTTLE ASKS WHY Greece and Portugal, which own 112 tonnes and 383 tonnes of gold respectively, shouldn't be forced to liquidate their gold. Back in July, 2010, we puzzled how it was that the Bank for International Settlements would suddenly show 382 tonnes of gold on its balance sheet at precisely the same time that Portugal's debt and fiscal problems were making financial headlines. Our view then was that Portugal had pawned its gold to deal with its financial woes. The answer to Mr. Cottle's question, in at least Portugal's case, could very well be that the family jewels have already been pawned.
IN CASE ANYONE THINKS that the current borrowing spree on the part of the federal government is statistically insignificant, we offer the following chart from the St. Louis Federal Reserve. . . And you thought the credit crisis peaked sometime in 2009.

Notable & Quotable

"I think the biggest take-away we can grab from [Mexico] is that another region of the world, another central bank region is buying gold. So, it is not just concentrated in Asia, that it is now in the Americas. So, the potential for another central bank in South America perhaps could be quite high going forward."

- Edel Tully, Union Bank of Switzerland

"Finally, with gold supported by multiple fundamental forces, one of our pre-conditions for a bubble is the asset has to be 'over-owned.' All the gold produced around the world over the past 110 years (which accounts for more than 80% of all gold ever mined) at today's prices is equivalent to only about 3.9% of the combined total value of stocks, bonds and cash around the world. While up from the 1.3% in 2000 when gold prices were depressed, it is similar to the 3.5% in 1990 and well below the whopping 12.1% in 1980 when gold traded near its last peak. While gold's popularity is returning, it does not seem 'over-owned.'"

- Jeff Kleintop, The Street

"The official wisdom is that Greece, Ireland and Portugal have been hit by a liquidity crisis, so they needed a momentary infusion of capital, after which everything would return to normal. But this official version is a lie, one that takes the ordinary people of Europe for idiots. They deserve better from politics and their leaders. To understand the real nature and purpose of the bailouts, we first have to understand who really benefits from them. Let's follow the money. Already under this scheme, Greece, Ireland and Portugal are ruined. They will never be able to save and grow fast enough to pay back the debts with which Brussels has saddled them in the name of saving them."

- Timo Soini, the True Finn Party, Finland

"I've been recommending gold since I started Mad Money . . .There will be moments of fluff but I'm not really trading it . . . I regard it as the currency of your portfolio . . . I feel very strongly we are not in a topping phase. . .I'd rather have the insurance policy of gold rather than the insurance policy of GEICO." 

- James Cramer, CNBC's Mad Money

"The bigger inflation event (QE3?) would use newly created base money for the immediate benefit of debtors. Sending checks to indebted homeowners made out to their creditors would be an example of quantitative easing that would be popular among the masses and economically stimulative. It would allow a new credit bubble to expand and prices of goods, services and assets to increase. We think this form of QE — broad debt socialization – is inevitable."

"All the while we expect precious metals, agricultural, basic materials and energy prices to climb consistently through QE2 and QE3. We believe the bull market in precious metals will run faster and higher than consumable commodities and begin to fade only after a third-wave parabolic price shift higher. We think the bull market in consumable commodities will kick-in significantly once consumer confidence and significant (price-generated) nominal output growth returns."


by Cullen Roche

Today’s FOMC Minutes from the April meeting shed some light on their exit plan (or lack of a plan). They explicitly say that policy normalization will not necessarily begin soon. In essence, their plan appears to be ending QE2, followed by ending QE-lite (reinvestments) followed by rate increases and finally ending with asset sales. They place a 5 year timeframe on the entire exit strategy. In short, expect the Fed to remain pretty close to permanently accommodative:
“Meeting participants agreed on several principles that would guide the Committee’s strategy for normalizing monetary policy. First, with regard to the normalization of the stance of monetary policy, the pace and sequencing of the policy steps would be driven by the Committee’s monetary policy objectives for maximum employment and price stability. Participants noted that the Committee’s decision to discuss the appropriate strategy for normalizing the stance of policy at the current meeting did not mean that the move toward such normalization would necessarily begin soon. Second, to normalize the conduct of monetary policy, it was agreed that the size of the SOMA’s securities portfolio would be reduced over the intermediate term to a level consistent with the implementation of monetary policy through the management of the federal funds rate rather than through variation in the size or composition of the Federal Reserve’s balance sheet. Third, over the intermediate term, the exit strategy would involve returning the SOMA to holding essentially only Treasury securities in order to minimize the extent to which the Federal Reserve portfolio might affect the allocation of credit across sectors of the economy. Such a shift was seen as requiring sales of agency securities at some point. And fourth, asset sales would be implemented within a framework that had been communicated to the public in advance, and at a pace that potentially could be adjusted in response to changes in economic or financial conditions.
In addition, nearly all participants indicated that the first step toward normalization should be ceasing to reinvest payments of principal on agency securities and, simultaneously or soon after, ceasing to reinvest principal payments on Treasury securities. Most participants viewed halting reinvestments as a way to begin to gradually reduce the size of the balance sheet. It was noted, however, that ending reinvestments would constitute a modest step toward policy tightening, implying that that decision should be made in the context of the economic outlook and the Committee’s policy objectives. In addition, changes in the statement language regarding forward policy guidance would need to accompany the normalization process.
Participants expressed a range of views on some aspects of a normalization strategy. Most participants indicated that once asset sales became appropriate, such sales should be put on a largely predetermined and preannounced path; however, many of those participants noted that the pace of sales could nonetheless be adjusted in response to material changes in the economic outlook. Several other participants preferred instead that the pace of sales be a key policy tool and be varied actively in response to changes in the outlook. A majority of participants preferred that sales of agency securities come after the first increase in the FOMC’s target for short-term interest rates, and many of those participants also expressed a preference that the sales proceed relatively gradually, returning the SOMA’s composition to all Treasury securities over perhaps five years. Participants noted that, for any given degree of policy tightening, more-gradual sales that commenced later in the normalization process would allow for an earlier increase of the federal funds rate target from its effective lower bound than would be the case if asset sales commenced earlier and at a more rapid pace. As a result, the Committee would later have the option of easing policy with an interest rate cut if economic conditions then warranted. An earlier increase in the federal funds rate was also mentioned as helpful to limit the potential for the very low level of that rate to encourage financial imbalances. A few participants expressed a preference that sales begin before any increase in the federal funds rate target, and a few other participants indicated that sales and increases in the federal funds rate target should commence at the same time. The participants who favored earlier sales also generally indicated a preference for relatively rapid sales, with some suggesting that agency securities in the SOMA be reduced to zero over as little as one or two years. Such an approach was viewed as allowing for a faster return to a normal policy environment, potentially reducing any upside risks to inflation stemming from outsized reserve balances, and more quickly eliminating any effects of SOMA holdings of agency securities on the allocation of credit.

Most participants saw changes in the target for the federal funds rate as the preferred active tool for tightening monetary policy when appropriate. A number of participants noted that it would be advisable to begin using the temporary reserves-draining tools in advance of an increase in the Committee’s federal funds rate target, in part because doing so would put the Federal Reserve in a better position to assess the effectiveness of the draining tools and judge the size of draining operations that might be required to support changes in the interest on excess reserves (IOER) rate in implementing a desired increase in short-term rates. A number of participants also noted that they would be prepared to sell securities sooner if the temporary reserves-draining operations and the end of the reinvestment of principal payments were not sufficient to support a fairly tight link between increases in the IOER rate and increases in short-term market interest rates.
In the discussion of normalization, some participants also noted their preferences about the longer-run framework for monetary policy implementation. Most of these participants indicated that they preferred that monetary policy eventually operate through a corridor-type system in which the federal funds rate trades in the middle of a range, with the IOER rate as the floor and the discount rate as the ceiling of the range, as opposed to a floor-type system in which a relatively high level of reserve balances keeps the federal funds rate near the IOER rate. A couple of participants noted that any normalization strategy would likely involve an elevated balance sheet with the federal funds rate target near the IOER rate–as in floor-type systems–for some time, and therefore the Committee would accumulate experience during the process of normalizing policy that would allow it to make a more informed choice regarding the longer-term framework at a later date.
The Committee agreed that more discussion of these issues was needed, and no decisions regarding the Committee’s strategy for normalizing policy were made at this meeting.”
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by Lance Roberts

Over the last two weeks a lot of the bullish sentiment that was imbedded in the market has now given way to fear. We have written many articles posted here on this website about the rules of investing and no one pays attention to such rules until they have broken them all. Now is no different. Just last week I received an email regarding the correction in silver and his recent purchase near the top. After telling him all the reasons that he should sell into a bounce and remove the losing position from the portfolio – ultimately he just wanted to hear that someday it could well return to his purchase price. He is still holding that position today hoping that at some point he will once again break even on the investment.

This attitude is the single most common mistake that investors make. The idea of selling something when it isn’t working is revolting to their very nature, it means they are a loser. This is absolutely the worst possible mistake an investor can make. In investing you have to get used to the idea of losses. They will occur as regularly as the sun rises and sets. The difference between a successful long term investor and an unsuccessful one really comes down to following these very simple rules. Yes, I said simple rules, and they are – but they are the most difficult set of rules for any one individual to follow because of the simple fact that they require you to do the exact OPPOSITE of what your basic human emotions tell you do – buy stuff when it is being liquidated by everyone else and sell stuff when it is going to the moon.

The 7 Impossible Trading Rules To Follow:

Here are the rules – they are not unique or new. They are time tested and successful investor approved. Like Mom’s chicken soup for a cold – the rules are the rules. If you follow them you succeed – if you don’t, you don’t.

1) Sell Losers Short – Let Winners Run: It seems like a simple thing to do but when it comes down to it the average investor sells their winners and keeps their losers hoping they will come back to even.

2) Buy Cheap And Sell Expensive: You haggle, negotiate and shop extensively for the best deals on cars and flat screen televisions. However, you will pay any price for a stock because someone on television told you too. Insist on making investments when you are getting a “good deal” on it. If it isn’t – it isn’t, don’t try and come up with an excuse to justify overpaying for an investment. In the long run – overpaying will end in misery.

3) This Time Is Never Different: As much as our emotions and psychological makeup want to always hope and pray for the best – this time is never different than the past. History may not repeat exactly but it surely rhymes awfully well.

4) Be Patient: As with item number 2; there is never a rush to make an investment and there is NOTHING WRONG with sitting on cash until a good deal, a real bargin, comes along. Being patient is not only a virtue – it is a good way to keep yourself out of trouble.

5) Turn Off The Television: Any good investment is dictated by day to day movements of the market which is merely nothing more than noise. If you have done your homework, made a good investment at a good price and have confirmed your analysis to correct – then the day to day market actions will have little, if any, bearing on the longer term success of your investment. The only thing you achieve by watching the television from one minute to the next is increasing your blood pressure.

6) Risk Is Not Equal To Your Return: Taking RISK in an investment or strategy is not equivalent to how much money you will make. It only relates to the permanent loss of capital that will be incurred when you are wrong. Invest conservatively and grow your money over time with the LEAST amount of risk possible.

7) Go Against The Herd: The populous is generally right in the middle of a move up in the markets but they are seldom right at major turning points. When everyone agrees on the direction of the market due to any given set of reasons – generally something else happens. However, this also cedes to points 2) and 4) – in order to buy something cheap or sell something at the best price – you are generally buying when everyone is selling and selling when everyone else is buying.

These are the rules. They are simple and impossible to follow for most. However, if you can incorporate them you will succeed in your investment goals in the long run. You most likely WILL NOT outperform the markets on the way up but you will not lose as much on the way down. This is important because it is much easier to replace a lost opportunity in investing – it is impossible to replace lost capital.

Market Position

Currently the market has issued a sell signal on a weekly basis which should not be ignored. This implies that you should be increasing exposure to cash and fixed income and reducing exposure to risk based assets. HOWEVER, on a daily basis the markets have gotten oversold so any selling is recommended on a bounce in the markets over the next several days to a week.

Summer months tend to be the weaker months of the year to invested in the markets so reducing some exposure to risk makes some sense. Sell losing positions first on a rally and then trim back positions that have gotten overvalued and stretched during the run up from the lows of last summer.

Holding a cushion of cash will be beneficial over the next couple of months and should we have another correction as we saw last summer (I have marked the retracement levels) we could have several good opportunities to add value to portfolio holdings at better prices.

Economics are showing signs of deterioration on many fronts so we want to keep a watch on the broader macroeconomic issues but from an investment standpoint managing the risk in portfolios is highly important to longer term success. As my uncle used to say - “…if you prune your garden from time to time it will yield a much more bountiful harvest.”

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