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.

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.

Smoot-Hawley Anyone?

Posted by Ray on September 29, 2010 under Main | Be the First to Comment

Here we are some 81 years after the Great Crash of 1929 and what turned out to be the beginning of the Great Depression which ushered in unusual monetary policy and solidified Keynesian economics. Part of the reason for the Depression was probably the best intentioned, yet most ridiculous, legislation which placed tariffs on imported goods, Smoot-Hawley. The idea was to protect America and to bring us economic riches, but the exact opposite happened. While not all of the Depression can be blamed on that legislation pretty much everyone agreed that it was a major contributing factor as it triggered trade wars. 81 years later and we are repeating the same mistake, politicians never, ever, learn.

I was shocked when the bill passed committee, well, not shocked, but surprised, but I am dumbstruck by the fact that it went to the House for a vote… and passed! I am referring to the brain child of Lindsey Graham and one Mr. Charles Schumer, 2 peas definitely not alike with the exception of being idiots. The bill I am referring to is Schumer-Graham, the new Smoot-Hawley, which will force Treasury to impose tariffs on countries they feel are manipulating their currency lower, in this case against China. One wonders if the U.S. will feel the wrath of the bill since we are sinking our own currency, but we would never manipulate our dollar lower, yeah, right.

I had spoke about a brewing trade war with China about a year ago as we leveled tariffs on some steel imports and tires. China responded with claims of dumping cars and chicken products and we retaliated, etc., etc. The politicians will not feel, yet, the fallout of this idiotic move, but the people who are struggling sure will. This will essentially guarantee that we will place tariffs on cheap products made in China, I wonder if the iPhone will fall in this category, which impacts the shoppers of Walmart the most, or Target or insert your favorite low cost store here.

I wonder, why does Washington hate the poor? Because that is exactly who they are punishing with this legislation, the poor. They will have to pay higher prices for what used to be low cost goods, money they do not have I might add. While the guise of this bill is to protect American jobs, read protectionism, it will likely do the opposite as China will retaliate in some fashion, I am sure of it. It also makes little sense to give your largest creditor a hard time and to alienate the fastest growing, or one of the fastest growing, economies in the world. Well, Washington is brain dead and probably never thought this far ahead, but still, how could they not?

China already made claims about other chicken products, this is a new claim a couple days ago, which shows that they are willing to do something to return the favor. What that is, who knows, but perhaps they will void more financial contracts with U.S. banks or ban some products. What I am sure of is this will pave the way for more protectionism worldwide and that is not good. You cannot legislate your way to prosperity and punishing a country for keeping their currency cheap is just wrong. I have stated many times before that a major revaluation of the yuan will lead to mass bankruptcies in China, but this is what the U.S. wants, not a strong dollar, but a strong yuan, who cares about the dollar anyhow.

It will not create jobs domestically for one simple reason, Vietnam has favorable currency rates, so does Indian, Indonesia, Peru, Mexico, Malaysia and many other countries. What are we going to do when our corporations move to these other countries? Are we going to tax them or simply place general tariffs on the products manufacturer there? Are you getting the point yet? Capital will flow to the next easier place to do business and Congress can continue to throw up road blocks, but they will fail. Not to mention that we want to double our exports in 5 years, according to Obama, and if we slap China do you really think they will let us have free reign or trade with them? Nope.

This is a job killer and will turn the troubled economy into deeper mud, there is simply no way to deny this. I just cannot believe Congress passed this bill this far, it makes zero sense. I know the Democrats are desperate for votes and this is a populous bill, but most people will see it, if they at least paid attention in high school history class, as a major problem for us. Especially since most Americans know China is our largest lender. Worse is that only 70 or so in the House voted against it… how can there be that many stupid people in Congress?

The bottom line is that our sugar daddy is going to be upset and probably cut us off because of this. We will now have fewer jobs and little financing of our massive deficits. Nice job guys, perhaps you would like to come to each Americans home and kick them in the shin as a follow-up because I do not see how they can top this idiotic move.

Quantitative Easing 2.0

Posted by Ray on July 8, 2010 under Economy, The Federal Reserve | Be the First to Comment

I have written about money velocity at length and what I think will eventually happen and much of my thesis is about to be put to the test. For whatever reason the market seems to think massively shrinking consumer credit is a good thing and that the Federal Reserve will be starting a new QE process very soon, which is the news this afternoon that coincided with the parabolic move late in the day. However, I cannot disagree with this more and believe that any quantitative easing will do nothing to help expand credit or increase the money supply to the public. We have at the very least disinflationary forced if not outright deflation and the Fed is already running negative real interest rates.

If you recall about a year ago there was a paper from a Fed of IMF official, the authors name escapes me, that recommended real interest rates to run at -5% annually. At the time everyone thought the man was nuts and he was/is in my opinion, but the only way to get real rates that low is through loose money policy and quantitative easing. The Fed has maintained, and will continue to maintain a zero interest rate policy forever as far as I can tell, a loose monetary policy and performed the only quantitative easing policy the U.S. has ever seen, $1.5T in agency and U.S. treasury paper. Unfortunately we still have no idea what the long-term impact of these policies will be, but they cannot be good. These policies are causing real rates to go negative and mortgage rates to plummet.

In order to get the target rate to -5% the Fed will need to buy much more paper than it owns now. My guess is another $2-3T in additional paper and, again, we will not know what the impact of this QE program will be to our economy or currency for some time, but it will not be good. I am not sure why the Fed or this President cannot figure out that interest rates really don’t matter and declining credit is actually a good thing. In fact, all of the “bad news” is really long-term good news as far as the consumer is concerned, not the employment or housing data, but consumer credit. This de-leveraging is just what is needed as we were all awash in debt and most people cannot or could not ever repay their debts. I have never seen a government so desperate to reignite indebtedness of the public like we are seeing right now, it makes no sense long-term.

So, the Fed will start QE again, what will this do? Nothing. Will it increase the money supply? Yes, but not the public’s money supply merely the banking sectors balance sheet which is supposedly flush with cash anyhow. Banks are not lending money because they know they will not get repaid, but borrowers simply do not want more debt either, a good thing! We have mortgage rates below 4.6% and there is no demand, it just doesn’t get much better than that right now, although I think mortgage rates go sub 3% soon. Quantitative easing will do nothing to improve that situation and it certainly will not boost the confidence in the USD which is more than likely the goal, remember, the only way to double exports in 5 years is to devalue the dollar, but it will not work.

The point is that all the QE in the world will not put money in your pocket or your employer’s bank account to give you a raise. Essentially, from a monetary point of view the Fed is done as it cannot get money into the system. QE will merely create inflation, but not the kind of inflation Ben wants, Ben wants wage inflation and QE will merely create dollar devaluation which is Weimar Republic type of inflation. The public also does not want more games or trickery from the government and it frightens me to think what could happen if Ben goes down this reckless path. Remember, just because there is not an impact from his current policies today does not mean there will not be negative implications from these idiotic policies a year or 5 years from now.

What Ben will tell Obama is to create a direct QE program, i.e. a Bush style stimulus, a big one. I do not believe this will go over very well nor do I think voters are in any mood to be bribed with their own money this year, but if one is unemployed and offered $2,000 could or would they say no? Probably not. This type of stimulus would create what Ben is looking for, wage inflation and money velocity, but make no mistake it will be a short-term boost only. We have a long time before we are out of this mess and we have much pain ahead of us. We need to suck it up and deal with it. Contrary to popular belief it is not Bush’s fault, it is all politicians fault going back 30 years and the only cure is pain.

We will still look for an easy way out and probably do QE with another stimulus, but make no mistake that will be suicide for our countries long-term financial health and our currency will be in major trouble if we choose that path. I hate to say it, I have friends who are unemployed, but we must take the pain as it will be shorter than looking for the quick fix. We are all credit junkies and we got to kick the habit.

Why you should always be bullish on precious metals

Posted by Ray on April 12, 2010 under Main | Be the First to Comment

Many people question whether or not they should own precious metals, gold, silver, palladium or platinum, in their portfolios for the long-term. Many are concerned about inflation versus deflation with the former being bullish on metals and the latter being bearish. In my opinion, neither situation should influence you to own or not own metals.

My thought process is fairly simple, what is the Federal Reserve’s ultimate goal? To keep a stable monetary policy along with full employment, but the way they do this is through keeping inflation alive and well in the U.S. In fact, the Fed would like to see annual inflation of about 2-3% every year. How they get inflation into the system is through the printing of money and over the long-term this devalues the dollar. The real question is whether or not the latest printing of some $2T will create inflation and, in my opinion, it will at some point in the near future. However, ignore what is happening now and let’s take a look at what the Fed has done to the U.S. dollar over the long-term.

The need for the Fed to maintain its 2-3% rate has led to the dollar to have a very clear long-term trend, down. I think this point is irrefutable based on the 30+ year chart. Given the Fed’s bloated balance sheet, which is not going anywhere for the foreseeable future, it is only a matter of time before the dollar goes even lower. I can hear everyone now, but Ray, there is no money velocity and deflation is here to stay. You would be correct, for now, but what we know is that longer term this money the banks and the Fed hold will make it into the economy, we just don’t know when that will happen. When that money reaches you, the end user, we will see inflation, eventually.

At the very least we will see the dollar devalue moving forward given the projected deficits and treasury supply. We also know that the Presidents plans to double exports, which is highly unlikely to happen I might add, would mean an intentional devaluation of the dollar. It seems that FDR’s policies are alive and well in the current White House, but there is no gold to confiscate this time to revalue the dollar. Instead they have Ben’s printing press to take care of that. However, an intentional devaluation of the dollar in today’s world is bound to go wrong as there is more money in the system now versus 1933-34 and there is no gold backing to stop the downward trend of the dollar.

This is not a partisan issue as Bush did much damage to the dollar and one can say that the bull market from 2004-2007 was because of his reckless spending and bringing the dollar down to new lows. I do not believe there is any real way to save the dollar at this stage. Either we need to bring interest rates up from the ZIRP and implement austerity actions that would mean no politician would ever get elected, from either party, again. There is also no way they will cut spending, ever, as both parties have spent way beyond our means and who would campaign on higher interest rates, higher taxes and cutting social programs? Obviously the answer is clear.

It is because of this belief that I know holding precious metals is a wise decision. You may have the timing wrong on when you buy them, but if you hold them long enough you will do just fine, in my opinion. I am a big fan of silver because it is a dual purpose metal, industrial use as well as a precious metal. It is my belief that all the easy silver has been mined and this is a simple supply and demand issue. If we examine how much silver is mined in the U.S., it is roughly 40M ounces, and the U.S. Mint has produced about 9M American Silver Eagles last quarter, annualized out that is 36M ounces of silver. The Mint along is sucking in most of the U.S. mined silver alone. Considering silver is not recycled as much as most other metals this means a new supply will have to be found in the next few years.

Considering a new mine takes months to open and no miner only concentrates on silver, typically silver is a byproduct of copper, gold or other metals, this means new mines are not on the verge of opening anytime soon. Some estimate that all the above ground silver will be used within the next 6-10 years which means supply will continue to dwindle lower and prices should move higher. Frankly, silver is the easiest sell in the world because if you believe in an economic recovery you have to won silver, because of increased demand, and if you believe the world is ending you have to own silver, to preserve your wealth. Either way, the case is bullish, but one should also invest in other metals as well. My other “favorite” metal is palladium, it is a green metal and has many uses from catalytic converters, hydrogen cell cars all the way to being used in jewelry.

What about deflation? Yes, we are in a deflationary spiral right now, but we have had deflation for how long? A couple of years, almost, and what has precious metals done during that time frame? They have risen, why? Obviously people are concerned about another complete financial meltdown and precious metals are a safe haven because they will always be worth something. Others think there is a global economic rebound and sees the use of some metals for industrial uses about to explode, but one must remember that there was also more gold sold in 1999 than in 2001 because people do buy gold when times are good, I am not sure of the exact reason. Others see inflation coming our way in the future and are using metals to hedge against that bet.

No one knows what is going to happen in the future, but the one thing I am confident about is the governments and Federal Reserve’s ability to devalue the dollar, on purpose, to keep up with the population growth. This makes metals attractive over the long-term, in my opinion. Since we have had such a long bout of deflation and PM’s have gone up just imagine if we get any real inflation. I am not worried about deflation or inflation for that matter, both will happen over time. What I concentrate on is buying silver every month and I have recently started buying gold again as well. If you buy some every month you are dollar cost averaging in. I also fully expect some selloff in the metals market when these sovereign debt issues blows up and money pours into the dollar, but the dollar will sell off because in times of stress it is merely the least junky asset to buy, only because it is liquid and you will get your money back.

However, if that does happen you can also rest assured that the Fed will do its part and print more money. Politicians will do their part as well and spend more money. Both of which devalue the dollar and make metals go higher. The fact of the matter is gold and other PM’s are a safe haven which performs better than equities during times of stress. Yes, I realize their prices sold off in 2008 during the crisis, but considering that was because banks and hedge funds needed cash, not metals, and sold everything they had. If you look at the performance in the beginning of 2009 prices were on the rise again when liquidity and the need to raise cash were over because PM’s hold real value and there was a fear that banks would all implode. That proves that PM’s are a safe haven.

Obviously one can invest however they choose, but to ignore PM’s, in my opinion, is a huge mistake. Silver is the obvious metal to own for those in doubt since it serves that dual purpose of a PM and as an industrial metal. I am a buyer of silver at these prices and will buy all the way up to $20 an ounce, maybe higher depending on what is happening. My current cost basis is very low, I bought most of my holdings at $9-13/oz, because it was at the cost of production so I will raise my cost basis, but if silver does what I think it will do over the next decade, I do not care because it will be the ultimate homerun.