I suppose it was back in the late fall and reiterated again in mid-winter that I believed the market would simply go up for no real reason until QE2 ended and then it would begin to decline as liquidity ended. It looks as though I was somewhat accurate in that prediction although you did not have to be a rocket scientist to figure that out unless you were a permabull with your blinders on and absolute faith in the government and the Fed in which case please move along.
The Fed knew the same thing I and many others did and that is why at the last meeting they emphasized that they would continue to reinvest maturing paper and interest from the existing portfolio, kind of a QE infinity if you will, but on a small scale. I do believe they will let QE2 go and not announce anything new until the fall when they see the economy really weaken. I think a couple months of sub 100K jobs reports, with a healthy BLS birth/death adjustment, along with softening other indicators such as the PMI and so forth the Fed will get the point and step in with $1T in QE since $600B did not work.
That is how it works as one QE is ineffective the next one gets bigger. The really unfortunate part is that Japan has done the same thing and it did not work but there is a big difference between the US and Japan, we are the reserve currency and they aren’t. In other words, Japan could print all they wanted because their citizens bought their own debt and the world settled trades in dollars. However, the US is limited in what they can really do in QE because as the value of the dollar sinks, and we really had a nice scare a week or so ago, the world will pick a new reserve currency on its own. You know how that story ends.
Ben knows this and he knows that his QE options are limited and he can probably only get away with 1 more so it will be big, it has to be. If that one does not work and spur growth, well, the Fed is done and completely out of bullets in a traditional sense. We would see some new things coming to the table like in 2008 with all the new facilities and such, but I have no idea what they will be or what they will look like since we do not know how things will play out.
What I do know is that we should get a nice bounce in the dollar here sending commodities lower for a bit. This will give Ben and Washington a little relief and you an opportunity to buy, buy, buy every commodity you like. I love silver, still, wheat, gold, palladium, soybeans and corn (unless the subsidy is pulled). If those go on sale buy them either directly or via the growers or agricultural ETF’s.
In the mean time enjoy watching Ben sweat it out as he will not have answers for the weakness in the economy or the weakness is ‘transitory’ which is the longest transitory period I have ever seen. Kind of like this recovery it is the longest start of a recovery ever as it gains steam and loses steam every other week. Good luck.
I have previously laid out my thoughts as to what will eventually happen with the whole inflation-deflation debate, but the issue is still raging full speed ahead. It is interesting that it is hard to find 2 experts that actually agree on what will happen or is happening, deflation or inflation. I think it is obvious that we have disinflationary forces here as producers cannot pass along higher prices or they will lose business. In fact, only food, a basic necessity, has any real pricing power right now.
While I am comfortable claiming we have disinflation right now I do not think it will last for a very long period of time. I believe we will see more easing by the Fed via asset purchases, but that will not create immediate inflation. However, over a longer period of time we will see that inflation pick up and not because of money velocity, but because of straight out dollar devaluation. Let me explain.
We did not experience inflation in the 1930’s because no one spent large sums of money on a regular basis. People actually were starving even as food prices declined, sad really. The thing is that since we were on the gold standard, or a form thereof, it was impossible to have true inflation even though FDR was spending like a madman. The Fed was also not in the practice of buying assets because, well, they followed the rules. Because of the gold standard and there were no asset purchases, government bonds or otherwise, inflation remained tame, deflationary in fact. This is a very 30,000 foot view of the situation, but I think you get the gist of what I am saying.
Now we do not have the gold standard, I am not preaching for a gold standard either, just pointing out the obvious, and we have a completely fiat money supply. The Fed has used its “emergency powers” to do what it would not do in the 1930’s, buy assets. It is clear that the asset purchases are doing nothing for the economy other than keeping rates low on loans, which no one wants or are really willing to make unless you have a perfect credit score. It is not even kicking up much inflation, at all, which is because there is simply zero money velocity. Since there is no money velocity the typical economist will say that inflation is impossible and it can never happen, never say never.
What the heads buried in the sand do not realize, because they are using the Depression as their road map (they always do this at the wrong time I might add), is that the dollar is floating now with nothing backing it. That in itself is not bad, as a matter of general opinion, as long as the printing press is used sparingly and every country prints money at relatively the same pace. The problem is that now, after the crisis supposedly ended, countries are printing money at a slower pace or they stopped printing altogether. Many are certainly not doing asset purchases.
Forgetting the fact that QE will do nothing to ease the pain of the economy being bad, sorry, but it will do nothing whatsoever, what it will do is wreak havoc on the dollar. Since the currency is floating more printing and asset purchases will diminish the value of the currency. This has been Ben’s and Obama’s plan all along since Obama wanted to double exports within 5 years, something that can never be accomplished. We are seeing the impact of what more printing will do to the dollar now, unless you think 1.5 cent moves in the Euro/USD pair is normal, as investors move to a currency that is somewhat more sound, not that the Euro is sound, but perception is half the game.
The citizens, us, will not feel the devaluation right off the bat because we consume 87% of what we produce domestically. However, imported products will cost more and we do import a lot of goods, obviously. As domestic supplies are sucked up by foreign countries, as our dollar is worth less thanks to Ben, we will have to import more from elsewhere. This is how our next bout of inflation will begin, dollar devaluation without an increase of money velocity. If you think about it it will make sense, capital flows to the land with the cheapest goods and a weak dollar means China, Europe or whoever, will find more value, cheaper products, from America.
That actually sounds good, more purchases of American goods means higher production as we have to replace what others are buying, but that may not be the case. Why? Simple, prices domestically will be rising and our government, always trying to do the right thing will institute some sort of protectionist legislation to stop prices from rising as incomes are stagnant. It would be a form of capital controls of sorts, but in reverse. Can’t you see it now? Prices are rising and people are not able to get those big screen TV’s or something less important, food, so the government tries to stop it through making new laws. It sounds counterintuitive, but it would happen, look at what Congress wants to do to China in order to get the yuan to appreciate in value? Actually, if we do more QE Congress will not want that to happen because China will literally own us if or when the dollar is devaluated.
While all of this is happening the treasury market, after an initial huge ramp up in prices, this is what the Fed will be buying, will be in freefall as no one will want to be repaid, without a substantial risk premium, in devalued dollars. This will lead the Fed into more massive buying because even at this stage Americans will not even want to buy our own debt. Also, China will have no need to hold their massive treasury holds so they will be selling like mad. All of this is happening without money velocity picking up. Even if you think I am wrong about the previous paragraph think of it this way, if our production did pick up because of foreign country buying sprees that means we will have the money to buy things, but it will only increase the inflation rate… damned if it does, damned if it doesn’t.
It has nothing to do with actual money velocity anymore, we even have mild inflation with dwindling velocity now, and has everything to do with confidence in the system. More QE will be bad news for global confidence in the USD, it is on shaky ground as is. If we look at today’s market action it proves how the market will react, lower dollar, higher commodity prices and equities stuck because it is good news on one hand and bad news on the other hand. Longer term high inflation is bad news for stocks, in my opinion, and bullish for commodities, obviously. Stocks are horrible inflation hedging instruments, look at the last 10 years for proof, while silver (by far my favorite investment right now), gold and other metals should do very well. Of course, precious metals are not really an inflation hedge, but a currency hedge instead. Since we are looking at a currency issue rather than straight out inflation it makes bullion of any flavor very attractive.
Could anything change my mind about what I think will happen? Sure. If no QE happens it will be great news, but the likelihood of no QE ever happening again are about as long of a shot as you can get. While I am using QE for my defense of my position in this article I believe we can safely assume that budget deficits will not get better so even if no QE happens our spending will accomplish the same thing. I say that knowing that if the deficit does not resolve itself the Fed, to save the US, will still have to do QE eventually on a massive scale no matter what, to keep rates low so the interest doesn’t bust us. However, the Fed cannot suck in all that paper and treasuries will fail eventually.
Outside of no QE I think there is not much that can change my mind about what I think will happen. It is pretty much in stone and will happen either as I laid it out or in a somewhat similar fashion. In the near-term I am still bullish on treasuries, now that we sold off, and on silver, gold too, but I am more partial to silver right now. I am not crazy about stocks and would be very hesitant about committing major capital to any position right now, the market is trading odd to say the least. At this point bullion is your best play, silver looks very promising and a recent Scientific American article points out that there is only 19 years left of easily mined silver, a no brainer to me, buy it.
People always wait to buy metals to “see how it does” and while they are waiting the price goes nuts and then they buy it and wonder why they lost money. Don’t be one of those people, but buy it smart, some every month. Because even if you think the bulk of my argument is wrong, or all of it, we have disinflation and higher bullion prices, what do you think will happen when we do have inflation? Not to mention silver is not only a precious metal, but an industrial metal. So, if you think the world is going to end, buy silver. If you think we are in a real recovery, buy silver.
Those who read my material know that I am a bull on precious metals and have been for some time. The main reason is because over the long-term the Federal Reserve intentionally devalues the dollar, its buying power is down some 95% since 1914. The most recent reason to be bullish on commodities as a whole is because of Obama’s plan to double exports within 5 years. This is a lofty and unachievable goal unless you plan on devaluing the dollar. Based on our debt load the devaluation of our currency will happen whether we like it or not.
I have been more bullish on silver and palladium over the recent months. I started buying silver at $9/oz and palladium at about $230/oz so I have hefty gains already, but I believe this is only the beginning. With both of these metals you are playing both a global recovery, which I see happening, but not as robust as the talking heads claim, or if you believe the world is going to end. Either way, you should own these metals, perhaps wait until they selloff in the near future, but nevertheless, why wouldn’t you own them?
Silver is used in almost everything you have in your house, from your TV to your cell phone. Silver is also going to be under tremendous pressure in the near future as the global population grows and people are lifted out of poverty because everyone wants a cell phone, computer or even a mirror, yes silver is used in mirrors as it is the most reflective metal in the world. Silver is a dual purpose metal as it is used in industry and as a store of wealth. The Chinese and Japanese used a silver based currency in the 20th century along with the U.S. as a bi-metal currency. Regardless, whether you think the world is going to end, own silver, or whether you believe in a global recovery, buy silver. Surface supplies are dwindling and all the easy silver has been mined. Combine that information with a growing population and we are bound, rather soon I suspect, to have a shortage in the supply/demand curve. Silver is an easy sell.
Palladium has been on fire lately moving up from $420/oz to $545/oz as of today, it was up $25 today alone! Palladium is used as an industrial metal first, mainly in catalytic converters, but it also is used in jewelry and as a precious metal, it was only recently that this usage has grown. Palladium is also a “green metal” as it can be used in several clean energy items, hydrogen cars for example. In short, it is a cheap alternative to its bigger brother platinum. Believe it or not, palladium is rarer than platinum and the largest world supplier of palladium is Russia.
I personally believe Russia is a pretty volatile place, I think history proves that point, which means the supply of palladium can be reduced if Russia throws a temper tantrum. There is always the possibility that Russia does something we do not like, like go to full war with Chechnya or invade Georgia, the country not the state. We could also upset Russia as well by invading, say, Iran, North Korea whoever which could create tension between the U.S. and Russia which could lead to less exportation of palladium to the U.S. If that happened prices would go through the roof.
The big story with palladium is the growth of automobiles in India and China. Between the 2 countries there are over 2B people who are being lifted from poverty to the middle class. As they ascend from poverty they will want what we have, cars. This means lots of catalytic converters in lower cost cars. Ultimately this means they will use less platinum and more palladium, regardless of where it comes from. All of this is a bull case for the metal and I think it could go much higher over time.
I believe the metal will be volatile, silver as well, because of the ETF’s designed to buy both metals. These ETF’s are likely the reason we see prices climbing recently so it is tough to know if the demand for the metals is organic or artificial, for investment purposes. Eventually people will sell PALL or SLV which will cause the prices to drop and that is the time to buy, IMHO. Also, if the dollar strengthens, which is what I think will happen, prices will drop then to. However, long-term I believe both metals are the trade of the century.
I am in no rush to sell what I have and am an active buyer, even at these levels. If you do a Google search for palladium coins or bullion you will see the supply is tiny. You can get palladium bullion, but you will pay a hefty premium for it. This is because supply is so limited and, as we know, you cannot just make more natural resources so the supply is finite. The price action is very exciting to those of us holding the metal already and what I like is the media never pays attention to either metal, never palladium though. Today with a 5% rise in value, no one said a thing, but if it was gold we would hear all about it, mostly negative things and gold bug jokes.
Silver and palladium are no joke and one should consider owning them. At the very least it is diversification especially if you own PM’s already. I am sure there is a bear case out there for both these metals, but I cannot find one that is reasonable.
According to the group’s voodoo economics, or survey data, 80% of their group declares that the economy is growing again. However, I beg to differ since whenever the majority of economists agree on anything they are typically wrong. Case and point, 2002 and several other times all throughout history, not to mention that the vast majority of economists CNBC and the major media outlets parade have this recession confused with the typical inventory recession, which this is not. This is a credit collapse recession, not the typical recession that we have experienced most times all throughout our history.
In fact, the closest example I can draw upon for a correlation to what we are going through is the Great Depression. During other recessionary periods we have not suffered the same symptoms that we have today and anyone who claims we have is simply not looking at the facts. During the 2000-2003 recession did credit collapse along with major banks and investment banks? No. How about in the early 1990’s? Kind of, but that was limited to smaller, much smaller savings and loans and we still did not see the sheer size of institutions fail like we have over the past 2 years. In fact, the credit contraction is astounding if we examine this period to the early 1990’s and nullifies any real comparison.
Other than that period we literally have to go back to the 19030’s for anything close to what have seen in the markets or the banking industry. It was/is that severe and the global impact that profound. It is also vastly different from the consumer prospective because the consumer is so leveraged compared to the 1930’s, now we have credit cards, mortgages of all flavors and consumer debt like we have never seen. Back in the 1930’s consumer debt was limited to the wealthy or upper middle class, mortgages were much different than they are today and HELOC or home equity loans were basically non-existent back then. All of these newer things makes today’s problems actually much worse than the problems of 80 years ago. Not to mention the derivative dangers, according to some experts these products basically guarantees the worlds GDP almost twice over.
How these experts, and I use that term loosely, determine that the recession is over with consumer credit contracting at a record pace, home prices contracting, government stimulus supporting GDP, banks still on the government life support system, the suspension of mark-to-market still hiding major losses and a host of other painfully obvious items indicating there is much more pain to come is beyond me. We know that the market has gone nowhere in real returns when we look at it priced in gold or subtract the dollars losses from the S&P’s return’s, but then again the market is not the economy and should never be confused with the economy.
I think that is the disconnect that economists have as they view the market as the indicator of recovery. If the market is the great forecaster that everyone thinks it is and truly looks 6 to 9 months out then why in 2007 did it hit all-time highs? In fact, stocks are horrible indicators of the economy and history is on my side on this one. See 2002 when the ISM gave a false impression of a recovery and stocks rallied only to hit new lows a few months later, the same thing happened several times throughout history. Before the 87 crash, during the 73-74 decline, in the 1930’s there were spectacular rallies. The Nikkei has had 420,000 total point rallies during the 1990’s, the so-called “lost decade”, some of which we 60% plus rallies. Many of these events were correlated with economic recoveries when, in fact, they were technical events and had nothing to do with economics.
Rising stock markets are not always a measure of economic stability or recovery. In many cases it is simply technical’s or, in our case, HAL9000 buying, since volume is at an all-time low and fund flows suggest it is not the retail investor. This is a traders market and only a fool would buy to own this market. I am not even sure I would rent this market since we had weak volume today and the market could not even hold a 60 point rally with the second string traders in today. The economic data is weak, bank earnings are probably going to be mixed and we know commercial real estate is collapsing, $22B in defaults in August of 09 versus $3B in August of 08 come on that’s a problem.
I may have missed a few points, 60 on the S&P to be exact, but I have done OK this year. Not to mention I bought silver at $9, gold at $880, platinum at $900, and palladium at $225. I don’t do everything right, but I realized I could not fight the liquidity bubble and I do know that this same liquidity bubble will implode eventually taking the US dollar along with it.
I have been reading this all over the internet over the past couple of days mostly from folks who receive the Webbot Prediction alert, or whatever it is called. Essentially, this program scans the internet for predictions of the future based on some algorithmic method. It was first developed in the 1990’s to find hot stocks, but then was used for such useful things as finding out the end of the world.
Now, do I believe such predictions? No. Basically, the creator even says its accuracy is as about as good as flipping a coin, so I guess we are all just as good as this multimillion dollar program if we just have a mere quarter in our pocket. Could something happen on October 25, 2009? Sure, who knows. Certainly the news today is not encouraging and the DXY is in dangerous territory again, but a complete collapse is not really likely in the near-term. There is simply too much liquidity in the market right now.
However, the value of that liquidity is a completely different question and issue. The value of the USD can fall to zero in one tick, we know that to be a fact, but even that is unlikely. As stated before, I believe we are in more danger of a bank run than a collapse of the currency in the near-term, but even that seems to have sorted itself out. In fact, what has saved all the currencies of the world, including the USD, is the fact that they all printed their way out of this mess almost equally debasing their own currencies. Even though that is a true statement it is also true that the US is definitely guilty of printing more money than most other countries and it is also true that we have poor leadership and dismal fiscal policies which is why the USD is the poster child of a weak currency.
Super power or not, we are in the last throws of glory days thanks to decades of selfishness and political indifference to fiscal sensibility. You cannot borrow and spend your way to prosperity, regardless of what Ben Bernanke, Barney Frank, Nancy Pelosi and Obama thinks. This means that we will eventually suffer the decay of currency collapse, perhaps “soon” and that depends on your definition of soon, but it is unlikely on October 25, 2009.
I would encourage you to be prepared for currency devaluation, because we are experiencing it now in a very small way, by investing in hard assets such as gold, silver, palladium, and platinum. I believe that silver and palladium represent the best value at this time, silver is at $17 when gold just made a fresh high, the last time gold was at $1030 silver was at $20/oz. Palladium could easily be trading higher given the green push we are in and the rarity of the metal. Either way, if you won it and things do get worse and the headlines are true, you will have your wealth preserved and protected.
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