The dollar is dead

Posted by Ray on February 21, 2011 under Main | Be the First to Comment

We have witnessed the Middle East go up in flames and the troubles in Europe start to percolate again, but the dollar is not doing anything. I am only surprised that it is happening so soon, I thought there was more time. While I highly doubt that anyone will rush back into the greenback it could happen. The world’s faith in the US has been shaken by our inability to seriously discuss our deficit and debt problems. A perfect example is the latest round of talks encompasses cutting some tens of billions of dollars from a mere 12% of our total budget leaving the entitlements and military spending off the table, is it any wonder why no one trusts us to seriously address our debt issues?

If people are not buying dollars what are they buying? Gold and silver. The prices do not lie and both metals have moved significantly over the past few weeks as the Middle East began to demand regime changes. All the while the USD has basically treaded water or moved slightly down. Not only does the lack of interest coincide with the latest budget battle but it also coincides with the fact that we are right in the middle of QE2 which was frowned upon by most nations. The double whammy of our inability to seriously deal with our debt and our very own central bank monetizing large amounts of our debt, over mythical low inflation figures I might add, makes other countries stop and think about how to allocate their assets during times of uncertainty.

Overall the US total debt and monetary policy is also inflationary which makes an inflation protected asset more attractive than UST’s and dollars. Why would investors choose gold and silver over TIPS? Because no one trusts the government to actually track inflation honestly which is why you are seeing lower inflation expectations in TIP yields right now. Again, gold and silver fit the bill as an alternative as a flight to safety. Granted, gold is considered safer than silver, but lately silver has picked up more prestige and I believe silver will make some spectacular moves in the near future. In other words, gold has likely picked up more of the safe haven assets than silver but it is clear that both metals have outperformed the dollar and may be replacing the dollar until something else comes along.

So, is the dollar dead? I think it is one its way if we do not address our debt and annual deficits this year. The deficits are so bad, so outrageous and so dangerous that ignoring them for one more year may be devastating. Our total national debt, officially, if 100% of GDP and our unfunded liabilities is tens of trillions of dollars… we got serious problems. Adding insult to injury is the whole QE situation which is debt monetization no matter how you slice it. This shows weakness and is highly inflationary which will drive foreign investors away from the USD. Why would you buy an asset today that you know will be worth less in the future? You wouldn’t and either will other countries when it comes to USD’s.

The fact that we have had a few governments get toppled and a few more on the way in the most volatile region in the world and the dollar has not rallied is kind of scary. Instead we have seen commodities continue to rally, stocks (I guess the only source of our economic success) go straight up, and the dollar trend a bit lower. In the meantime gold and silver are being treated as currencies and when turmoil kicks up they go up in value. I have known for a long time that the dollar is in trouble and would blow up because we have a lack of leadership in Washington who do not want to make hard choices and the Federal Reserve who seemingly has lost its mind and has missed every major issue with our economy over the last 10 years who has decided to monetize our debt.

This will end with high inflation and the fact that the Fed disagrees is exactly why you should agree with me. Gold and silver make sense, own them physically, along with other soft commodities. I fear that the dollar has seen its best days and while I do not know exactly what will come in the longer term I do know it will not be pretty. I think you will know who to blame by then, I hope at least.

Who are the patriots?

Posted by Ray on February 18, 2011 under Main | Be the First to Comment

Social unrest has swept the globe and the only surprise to this fact is that it has taken some 3 years for it to happen. In foreign lands which many have never even heard of the name of the countries the people want change, real change. Some are fighting because of political repression and others because of higher food prices, thanks Ben, and they are politically oppressed. Regardless of the reasons people are on the move and America is not immune from this change.

In Madison Wisconsin we are witnessing the first of what I predict will be many protests over public union contracts. It is simply amazing that the unions are so upset over modest changes to healthcare and pension premiums, 12% is the magic number there. However, it seems the real sticking point is that Wisconsin wants to reform the collective bargaining arrangement which has consistently favored labor for the last 50 years and, in my opinion, has allowed for unions to make demands that have led to higher taxation of the people because the pension funds were so underfunded, as participants did not have to add any money to it, and healthcare costs rocketed to the moon, again, participants had to add little to no money to their health insurance plan. On top of these fantastic benefits they have job security meaning they literally cannot be fired.

In a nutshell, states are going bankrupt in order to pay a few peoples pensions, often 70-80% of the last 3 years of the employee’s highest earning pay. Oh, did I mention that they also got mandatory 4-5% cost of living adjustments during their working years and during their retirement? It is a good deal and getting these public sector jobs are difficult and you typically have to know someone to get one. You also get nice vacation time as well, often starting off with up to 3 or 4 weeks and earning more as time goes on. When things do not go well you strike to get your way.

Unions are what drove GM and Chrysler out of business and their bankruptcies allowed them to start over with their contracts. Since those contracts were redone both firms are doing much better, go figure. Ford forced unions to the table threatening bankruptcy and got their contracts redone and look what is happening there. In all 3 cases the union employees are happy. Sure, they are not as happy as they were when the Job Bank was there, they got paid for months at normal rates if they were laid off, but they have hobs, goof benefits and in GM’s case they got the biggest bonus ever, I believe, last year. This is evidence that when you take the power away from unions it actually benefits the employees, but only time will tell if this continues but so far it looks pretty good.

The public sector though, well, should they be unionized at all? I personally do not believe so, but at the same time when dealing with the government some protection is warranted so I would say a nontraditional union is needed not the super strong unions we currently see that curry state and the federal government into bankruptcy. If you are paying attention to the Madison situation it is very interesting especially from the media’s perspective.

I have been watching a lot of MSNBC lately who was classic for smashing and ridiculing the Tea Party last year. I have to say that their coverage of Madison is much, much different than their coverage of the Tea Party events. For starters the Tea Party events were all nonviolent, completely peaceful open gatherings where kooks were chased away. Contrary to all reports no racists were there and I saw plenty of nonwhite people attend and, in short, they were people who cared about the country and wanted to restore some sanity in the government which is a noble cause in my mind. They were described by MSNBC as America hating racists who want to destroy this country, all we stand for and are violent, not one report of violence was ever reported to my knowledge.

Compare that to Madison which is all white, ironic in my opinion, they spat upon state senators, pushed them around, shouted them down, shouted for an Egyptian style revolution and held signs of the usual Hitler pictures. MSNBC said these people were being stripped of their civil rights and are fighting for democracy even though their elected officials fled the state so a vote could not take place. The protesters were teachers who walked out of their jobs, that they love, supposedly, to protest for a week straight so kids are now without school which means parents are paying for daycare or babysitting. These people are not fighting for work, they are not fighting against a massive pay cut or furloughs what they are fighting about is paying an extra 12% for their benefits that are outstanding and still way underpriced.

Keep in mind that if this bill does not go through some 6,000 people will lose their jobs, think about that for a minute. Instead of giving up 12% and the right to strong arm the state later on they instead decided to walk off their jobs, spit and shove people, and cost 6,000 people their jobs. Oh, the 12% benefit hike was on the table last fall and the union rejected it and they are trying to get it back now because of the removal of the collective bargaining language in this bill, keep in mind that the senate only got rid of the collective bargaining language because they rejected the 12% then, but decided to take it when the state decided to play hardball. What the new language does is gives the state more equal say in negotiations with unions instead of the unions having 90% of the power like they have now. It is time to reduce their power especially in the public sector where we all pay for these people through our tax dollars.

As far as who are the patriots I would have to say the Tea Party wins hands down. You may not agree with their politics, but I can guarantee you they will always be polite to you, respect your views, not spit on you, shove you and they will defend your right to say whatever and gather wherever you want just as the Constitution allows. I am not so sure about the Madison people I have a feeling if you agree with them they will like you, but if you disagree with them get out of their way and that is not patriotic, American or the sign of a healthy Democracy. I had to say m peace. Thank you.

The Bulls Still Have to Make Their Case

Posted by Ray on February 9, 2011 under Main | Be the First to Comment

I have stated that you have to be long this market until the Fed pulls the ample liquidity it has been pumping into the markets for the few months now. Before the Fed announced QE2 I was right to be bearish as the indices were heading lower under numerous stresses from both domestic and foreign sources. It was in August when Ben gave his speech about asset purchases and then the next meeting which started them that caused the markets to take off. Up until that point there was no real reason to be bullish.

Frankly, outside of the excess liquidity, there is still little reason to be bullish. Just because stocks move higher it does not mean that the economy is all better, sorry, but it does not work that way. I believe that the economic data we are seeing is heavily distorted and if we are in fact having 3-4% GDP growth, like several Fed officials claim, where are the jobs? That is a huge jump in GDP growth and that would certainly create jobs, but here we are witnessing the greatest exodus from the job market since the data has been tracked. The U-6 data is way up over 17% and Shadow Stats says we are saddled with 20%+ of unemployed/underemployed.

If we are experiencing 3-4% GDP growth why in the world are we still experiencing ZIRP and QE of any kind? It makes no sense at all. I know, because “inflation is too low.” Inflation as defined by Ben Bernanke and not by people who have to buy food and energy every day. The fact that we are arguing over the definition of inflation is asinine. Normal, sane people, would define inflation as the normal cost of living items, but the insane people say that inflation should be measured by the cost of computers and flat screen TV’s, that makes sense. The bottom line is Ben is distorting everything with this insane monetary policy and is causing food prices to rise around the world, including right here in the USA.

The economy is better, I have admitted this for some time now, but it is still sick and not functioning correctly. What we are seeing now with runaway government spending and excess Fed easing is a serious risk to the US dollar. I realize that every country wants a weaker currency so they can export their way to prosperity or so they can grow their way out of their debt problems, but this will not work for the US. The US debt issues are so large and the trade imbalances are so out of balance that it is impossible for the US to grow its way out of its debt problems.

While Ben tells Congress that the US must get the deficits under control immediately, a first I might add, it is impossible to do so. Have you ever wondered why the US cannot cut annual spending? They tell you it is because of entitlement programs, right? They also say these entitlement programs are solvent, at the moment at least, right? Wrong. The proof of this is in the annual deficits. When you received your paycheck there were federal income taxes withheld and FICA taxes withheld, for Social Security and Medicare. Supposedly the FICA taxes went into separate accounts to be used at a later date but our leaders used that surplus money to plug holes in previous deficits and gave the SSA and Medicare IOU’s instead. Now the SSA and Medicare are cashing in those IOU’s which is why the government cannot cut the annual deficit and it proves that the programs are insolvent.

All of this is evidence that the economy and economic health of the US is not good. We are still in trouble and all we did in 2008-2009 was transfer the bad debts from the banks to the US government, kicking the can down the road, and the banks are still in bad shape. The economy is not replacing lost jobs and probably never will replace all those jobs lost in the last few years. The only way the unemployment numbers will get better is because of how the BLS calculates the unemployed, i.e. not counting the ones that fall off the rolls.

The bulls need to make the case that the economy has really recovered. I am a bear and I said to own stocks, and commodities, and I was right too, but I am under no illusion that things are that much better. A stock market going up doesn’t really mean anything especially when the Fed is giving primary dealers billions of dollars every week to do something with. Not to mention that rising stock prices only help the investing class anyhow which is a shrinking portion of America nowadays.

The Employment Report and Current Events

Posted by Ray on February 5, 2011 under Main | Be the First to Comment

The world is in a very tough spot right now and the word of the day is social unrest. On top of the news from the Middle East we got some, in my opinion, pretty bad jobs numbers on Friday. Of course if it was a good report it is because of the ‘economic recovery’ and when the report is bad it is because of snow, rain, wind, Earth or whatever else they want to say instead of the truth, the economy stinks.

There was not one good piece in the jobs report, not one. Sure, an unemployment rate of 9% was the headline given to us, but doesn’t this strike you as being odd since the BLS just added in some 300K under reported job losses from last year? On top of that we had, unadjusted, horrible initial claims reports for January and even the adjusted reports stunk. Even though the economy did add jobs governments are laying people off which is a problem as this will likely continue on into the future. Overall, there is still some 5 people for every open job right now, think about that and then think about how long it will take for unemployment to actually come down, especially with new workers coming into the work force through population growth.

We are not going anywhere in the near future and for proof of this look at Bernanke’s speech the other day when he basically guaranteed QE3. As an aside, I love how he said QE2 worked because asset prices, stocks, and bond yields were going up. Umm, wasn’t QE2 supposed to create negative real interest rates? And since when do we use the stock market as a barometer for economic growth? In fact, QE2 did work if you thought it would benefit stocks, but it has failed miserably for the other areas it was supposed to help, i.e. jobs, economic growth and negative real interest rates.

However, QE2 did have a successful side effect that only a few people have realized, it has overthrown a couple of governments and probably will topple a few more in short order. Remember how I said you can get inflation without money velocity? It is kind of happening and just imagine what will happen when banks actually lend again. Now, Ben says food prices are from emerging market demand which is true, but it is also because of bad harvests, which will continue, and the fact that commodities are valued in USD’s which have been sliding down in recent weeks.

This means food prices have risen for the poorest countries in the world to levels that are just unsustainable. When food prices rise in America we can weather the storm for a while, but in some countries food at lower prices consume 50%+ of the average families budget so they do not have the luxury of riding out the storm or cutting back they simply go without. They can only do this for a little while before something gives and we have witnessed what happens when that something gives way. I also believe we have only seen the beginning of the problem as no one has figured out that this year’s wheat harvest is likely to be very, very, bad and we will see much higher prices in a few months. The weather is whacky and I have a strong suspicion that the Midwest will not produce what we are used too this year. If that happens things could get very interesting and perhaps, just maybe, we will stop paying farmers to grow food in order to turn it into fuel, use sugar instead which we pay farmers to not grow… get the picture yet?

Things are getting interesting and I am trying to stick around to see how it all ends. In the meantime I believe that one must be long commodities, silver and softies for sure, and stocks until QE is over, which is likely to be never. I say that with a caveat as I believe if QE3 does happen stocks might get very choppy and at some point people will figure out that ZIRP + interest on excess reserves + QE = Really Bad News and is bad monetary policy. Then again, only a few have figured it out so far so maybe I am too optimistic.

Anyone else happen to notice…

Posted by Ray on under Main | Be the First to Comment

All this talk about an economic recovery and how credit is flowing once again but I have never seen more advertisements for payday loans . From Montel Williams to some Native American guy selling a payday loan for 900% interest, no, I am not making that up, these firms are everywhere now.

I have nothing against them as they meet a specific need, but it is interesting that these firms are showing up all over the place. Especially since Fin Reg was supposed to regulate these firms. However, Fin Reg will also, according to a Forbes article, force some 10-15 million Americans out of the banking system and, ultimately, into these types of programs. All this talk about recovery and how the middle class has rebounded and how the government was going to fix everything by regulating the banks while at the same time we are seeing a rising number of payday lenders… go figure.