Profit Review, and More!

by Larry Edelson on February 8, 2010 at 8:30 am

If you followed my recommendations in last week’s column, then you grabbed some pretty luscious gains off the table, including up to …

40.8% gains on Dow Jones Diamonds (DIA)

34.0% on Energy Select Sector SPDR (XLE)

8.0% on PowerShares DB U.S. Dollar Bearish Fund (UDN)

62.7% on Korea Electric Power Corp. (KEP)

Well done. Especially considering the market tanked just after you grabbed your gains, with the Dow Industrial plummeting 312 points from last Tuesday’s high.

Now is not the time to sit back and enjoy the profits, or become complacent. Instead it’s time to think about how you can keep the profits rolling in!

But first, let me address the now widely-held mainstream view that the natural resource sector looks like it may have topped out.

My view: That’s hogwash. Indeed, if you think the great bull markets in natural resources are over, think again.

And do so by asking yourself the following very important questions …

Question #1: Do you think the Federal Reserve will tighten monetary policy anytime soon, or that it will truly exit its recent policies of propping up institutions or the economy?

My answer: Absolutely not. The Federal Reserve will not raise interest rates anytime soon, no matter what.

Nor will the Fed truly exit any of its recent market and lender of last resort policies either.

If push comes to shove and there’s another big financial institution that teeters on the brink, the Fed will be there right by its side to bail it out. So will all of Washington.

If another big company like General Motors needs to be saved down the road, ditto. The Fed will be there to prop it up … and so will Washington.

Mind you, it may not be the right thing to do, but those in power will do anything and everything to try and save the financial system, at any and all costs.

They will sweet talk you till the cows come home telling you they know what they’re doing, that even they hate it, but that it all must be done.

The problem though, is not what they do tell you.

It’s what they don’t tell you.

Washington will never admit that its hidden agenda is to inflate away the country’s debt problems by devaluing the U.S. dollar.

To rob from Peter (you) … to pay Paul (every creditor who’s lent this country money).

They won’t tell you that even though almost every country on the planet has done so and devalued its currency at one time or another in its history. From debasing silver coins to outright devaluations.

There has never been a modern society that has not effectively defaulted on its debts either publicly, or on the sly, through a currency devaluation.

That is the number one reason why I remain bullish on the best assets to own when government is diluting the value of your money: Tangible assets. Natural resources. With a heavy emphasis on the ultimate store of value, gold.

Gold and other tangible assets are the best investment when government dilutes the value of your money.

Question #2: Do you think the authorities in Beijing will overly tighten credit in their country?

My answer: Much has been made about Beijing’s recent attempts to slow loan growth in China and cool off the economy.

I, for one, applaud Beijing’s efforts. But I’m also a realist. And when push comes to shove — politicians and central bankers in Beijing are no different than they are anywhere else. There is simply no way a Chinese politician is going to do anything to squash an economic recovery. Period.

Why? Because it would cost them their jobs. And because, even if, for some crazy reason, Beijing tried to choke the economy — there are 1.3 billion souls in China that are powering that economy forward.

1.3 billion people demanding new, better lifestyles for themselves and their children.

So don’t bet on the Chinese economy taking a tumble here. Or, its stock markets.

Indeed, as I showed you just last week, it could actually be a very good time to add to your positions in China, via the iShares/FTSE Xinhua China 25 Index ETF (FXI). My recommendation: Consider adding to that position now!

But all this is just another reason I remain long-term bullish on natural resources. China’s gobbling them up at an unprecedented pace that is not going to stop, or even slow down much, anytime soon.

Question #3: Will the severe supply restrictions that now exist in several natural resources suddenly disappear, creating an oversupply instead?

My answer: I don’t think so. Not by a long shot. We have shortages in gold, oil, aluminum, rare earth metals, potable water, just to name a few.

What’s more is that with less capital and credit available — courtesy of the financial crisis — the supply constraints in many natural resources are bound to get worse, not better.

Many mines have been shuttered. Oil companies have put dozens of important exploration projects on hold.

Going forward, all of this will undoubtedly cause a setback in new discoveries and new supply sources, crimp production levels, and ultimately create even more upside price pressure on natural resource prices.

So What Can You Do
To Protect Your Wealth And To Profit?

My recommendations: Hold all open positions I’ve suggested in this column, which you can see in this table to the right.

Also consider …

Select foreign currencies, which rise in value against the dollar, and where you can also get a nice return. Two of my favorites are still the New Zealand and Australian dollars.

Select foreign stock markets, especially those that are rich in natural resources and where billions of new consumers are driving their economies upward. Examples: China, India, and most of Southeast Asia.

Additional select natural resources stocks, companies that control commodities. The list includes gold … oil … gas … iron … steel … aluminum … zinc … nickel … uranium … wheat … corn … soybeans … sugar … coffee … even water!

Best wishes,

Larry

Urgent: Grab More Profits!

by Larry Edelson on February 1, 2010 at 8:30 am

You’ve got a slew of open gains in many of the positions I’ve suggested in this column, beginning last March. Lots! What’s more is that they come on top of gains I already recommended you bag, like up to …

91.7% in ProShares Ultra Real Estate ETF (URE).

68.3% and 39.7% in Aluminum Corp. of China Ltd. (ACH) and PetroChina Co. Ltd. (PTR), respectively. And …

27.2% in CNOOC Ltd. (CEO).

But right now, it’s time to take action and grab MORE profits off the table.

I’ll tell you why in a few minutes. And it’s very important information you’re going to want to read carefully.

But first, let’s review the positions discussed in previous columns, specifically, the ones that I think you should take action on now …

A. Recommended in my March 16 column of last year …

Dow Jones Diamonds (DIA), at a price of about $72.31. Open gain as I write this: 40.0%.

Energy Select SPDR ETF (XLE), at the $42.00 price level. Open gain: 32.0%.

I SUGGEST YOU CONSIDER SELLING THE ABOVE POSITIONS AND GRABBING YOUR GAINS!

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B. Recommended in my column of March 30 of last year …

PowerShares DB U.S. Dollar Bearish Fund (UDN), at a price of approximately $25.11. Open gain: 8.4%.

I RECOMMEND YOU CONSIDER SELLING UDN AND GRABBING YOUR GAINS!

C. Recommended in my column of April 6 of last year …

Korea Electric Power Corp. (KEP), at a price of $10.24. Open gain: 62.8%. Nice!

I SUGGEST YOU CONSIDER GRABBING YOUR GAINS ON KEP NOW!

Meanwhile … hold all other positions I’ve recommended in my Uncommon Wisdom columns.

Now …

Why, you ask, am I recommending you consider taking so many profits off the table? Am I turning bearish on the stock markets? On natural resources? On China?

My answers …

A. No, I am not bearish on the stock markets. Right now I am very much neutral — as there’s no question in my mind that the broad stock market averages have reached a major turning point.

You can see the turning point by understanding the two cycle charts that I have for you today.

The top chart is a picture of the important 24- and 40-month cycles in the S&P 500 Index, showing a top due in early February.

The chart beneath it is also of the S&P 500 Index, but includes all known cycles impacting the market. In this chart you can see that the cycles call for a continued rally in the S&P 500 into August of this year.

Why the discrepancy between the data? What does it mean? How does one handle confusing forecasts like those conveyed by these cycle charts?

First, and bear with me as I get a bit technical, in the stock markets, the 24- and 40-month cycles are usually the dominant forces impacting price behavior. And right now, they show that the markets are very close to a top that could last for 12 to 20 months.

Typically, however, the composite cycle chart of the markets lines up with the dominant cycles. In other words, the bottom chart should show a pattern similar to that of the 24- and 40-month cycles chart above it.

But right now, these two charts are giving conflicting signals. That means …

That the markets are at an even more significant juncture than one chart alone would convey, and that …

Either the markets are going to fall hard, or …

The stock markets are going to show short-term weakness, then skyrocket higher.

I know, I sound like I’m talking out of both sides of my mouth. But I’m not. I’ve seen this confluence of conflicting cycle patterns before, and it almost always occurs just before huge moves in the market.

Second, strategy-wise, the way to play it is obvious when you have gains on the table, like you do with the above positions I reviewed:

You play it safe and grab your profits — and if the composite cycle picture dominates and the markets take off again to the upside, you then get back in.

In the meantime, you’ve bagged your gains and put them in your pocket, protecting you against the downside.

What about the fundamentals underlying the markets?

To be sure, they have suddenly shifted toward a more bearish angle — the Republican victory in Massachusetts, suggesting conflict within Washington … China putting the brakes on bank lending … and President Obama’s bashing of the banks.

But it’s not fundamentals that really drive the markets. It’s mass psychology. And if the composite cycle showing a rally into August becomes the dominant force in the markets, there will likely be plenty of positive news coming out to support it.

What that news might be, I have no idea. I do know one thing however: No one ever makes big money investing based on news, or interpretations of the news. The big money is made following the markets own rhythms.

Those rhythms, or cycles, say: Play it safe now, and if the market does break back to the upside, there will be plenty of time to get back in. Or, if they move to the downside, there will be plenty of opportunities there as well.

What about gold and gold-based investments? They should be held, no matter what. They are your ultimate insurance policy.

B. No, I am not bearish now on natural resources.

However, while I am a bit more neutral on the resource sector than I was just a few weeks ago, I remain long-term bullish.

The reason I also suggest caution in the natural resource sector is simply this: If the broad stock markets choose to follow the 24- and 40-month cycles down, then yes, we are likely to see a protracted correction in the natural resource sector.

On the flip side, if the composite cycles exert their influence, and the current turning point proves to be nothing but a short-term dip in the markets, followed by a rally into August, then I will turn all-out bullish on natural resources, even in the short-term.

For now, it makes sense to be a bit conservative in the resource sector as well.

C. As for China, I am as bullish as ever. Perhaps even more so. For two chief reasons …

1. China’s market has already had a major pullback — as much as 20%.

Moreover, as you can see from the chart, the cycles point to a bottom now, and a sharp rally into February, followed by another dip. Then perhaps an even more powerful rally in the middle of this year (not shown on chart).

2. Every economic stat I can find coming out of China is extremely bullish. The economy is firing away on all eight-cylinders.

Moreover, I view Beijing’s recent brake-tapping — raising bank reserve requirements and even telling some banks to slow their lending — as a positive. It’s a proactive move to prevent a bubble from brewing and to foster steadier growth.

Bottom line: I remain bullish on China, recommend holding all China positions, and be ready to add more China and Asian-related equities when I get the signal.

Stay tuned, more than ever before: Many markets have reached important inflection points!

Best wishes,

Larry

S&P500 top dividend stocks

After a rise of roughly 60% since its March 2009 lows, many would assume the S&P 500 would not boast too many hefty dividend payers. But this simply is not the case. In fact, some of the best yielding stocks are up substantially on the year.

As it turns out, four of the five best dividend yields on the S&P 500 (and six of the top 12) belong to telecoms. Apparently, cash flows haven’t suffered in telephone and internet businesses. Here are the five best dividend yields on the S&P 500, complete with key fundamentals.

Rural Telecoms Lead the Pack
Frontier Communications (NYSE:FTR) is a provider of local and long distance telephone, satellite, internet and wireless services to subscribers predominantly in remote and rural areas. Its shares are up approximately 30% since its lows last March. The stock currently pays a very substantial 13% annual dividend and trades with a price/earnings (P/E) ratio of 16.

Windstream Corporation (Nasdaq:WIN) is another telecom with a great yield. The company pays 9.15% annually and trades with a more competitive P/E ratio of 14. Windstream shares also have risen about 60% since the spring.

Windstream competes head-to-head with Frontier Communications in the rural and small town telecom market across the United States. In November 2009, Windstream made three new acquisitions.

Cost-Cutting Pays Off
Qwest Communications (NYSE:Q) is a telecom services provider in the western U.S. Qwest has an annual dividend yield of 7% and trades with a P/E ratio of 10. The company recently announced aggressive in-house cost-cutting initiatives, including curtailing merit increases to management for 2010.

CenturyTel (NYSE:CTL) is a rural and small- to mid-size city telecom service provider. Its stock trades with a P/E ratio of 12 and carries a healthy annual dividend of 7.70%. CenturyTel has a market cap in excess of $10 billion.

Cigarette company Altria Group (NYSE:MO) closes out the list of the largest dividend payers on the S&P 500. Altria pays investors 7.00% annually to hold the company’s stock and trades with a P/E ratio of 13.

The Wrap
It’s the dividend payers that typically offer the best returns on a long-term basis, and these highly capitalized, strong cash generating companies should prove no exception. That so many of the leaders should come from a single sector speaks volumes about the investment potential in that field. (To find out how to take advantage of dividend paying stocks, refer to Build A Dividend Portfolio That Grows With You.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

By Aryeh Katz

Japan: An Inflationary Spiral Ahead?

by Claus Vogt 01-20-10

During the past few years you have most likely read about Japan’s so-called lost decade or its so-called deflationary malaise. And you may have heard warnings that the Japanese experience might be the dire blueprint for what’s to come in the U.S.

Since there are some striking similarities between Japan of the early 1990s and the U.S. today, it’s definitely worth the effort to have a closer look at what is going on in Japan — and what is probably going to happen in the U.S.

First, the Similarities Between
Japan and the U.S. …

In 1990 a stock market bubble burst in Japan. Two years later an even larger real estate bubble burst. The economy was hit by a recession. Huge monetary and fiscal stimuli were implemented, and government indebtedness went through the roof, rising from 60 percent of GDP to as high as 200 percent, where it stands now.

In 1990, Japan’s stock market took a dive. A recession followed. In 2000, the same thing happened in the U.S.

When we look at the U.S., we see a similar pattern: The U.S. stock market bubble burst in 2000, and the U.S. housing bubble reached its zenith six years later. In each instance a severe recession followed. And both times the government reacted with gigantic monetary and fiscal stimulus. Consequently, government debt is currently at 85 percent of GDP and rising strongly.

In the case of Japan, many economists are bemoaning a deflationary and lost decade. They also fear a deflationary and lost decade in the U.S. And Fed chairman Ben Bernanke is one of them.

Others are looking at the huge money printing going on in the U.S. and the equally huge rise in government indebtedness. They’re predicting severe inflation. I’m in this camp, and I expect inflation not only in the U.S., but also in Japan.

Japan: The Deflationary Depression That Wasn’t

As you can see in the chart below, throughout most of the lost decade, the Japanese economy grew an average of nearly 2 percent. And inflation as measured by the consumer price index was also mostly up, but generally meandering around the zero percent level.

That’s called price stability in my book, and certainly not deflation. And 2 percent real growth is definitely not a catastrophe. If you don’t believe this, go to Japan and have a look. You’ll see a country with a very high standard of living, with a superb infrastructure and nice and clean cities.

So what’s behind the bad press Japan has gotten during the past 15 years?

Maybe the proponents of Japan’s deflationary depression story are somehow confusing the economy with the stock market or the real estate market. Both are down tremendously since their respective highs, which may certainly be depressing for investors.

Why There Hasn’t
Been Any Inflation … Yet

Despite all the money printing and government stimulus going on in Japan for many years, there hasn’t been inflation — until now, that is. Why this confusing anomaly?

Two reasons: First, a very high savings rate combined with strong patriotism enabled Japan to internally finance the steeply rising government indebtedness. And, second, domestic private and institutional investors bought nearly all government debt issued during these past 15 years.

Hence Japan did not have to compete internationally to raise capital, thus interest rates not only stayed low but fell ever lower! Yet this convenient arrangement is probably coming to an end soon.

Here’s why …

Demographics Are a
Huge Problem in Japan

Japan’s population skyrocketed from 58 million in 1950 to 127 million in 2006. Then this up trend reversed. It’s estimated that in just 15 years it will be below the 120 million mark.

Japan’s population is getting older and putting strains on its pension system.

That’s part one of a huge demographic problem. Part two is the population structure …

Japan has the oldest population in the world. The older-than-65 cohort already accounts for 23 percent of total population. In 15 years it will be 30 percent.

This is unbearable for Japan’s current social systems. So the government will have to react by raising taxes or taking on more debt − probably both. And herein lies a huge problem …

Japan’s Government Pension Investment Fund used to be the largest buyer of Japanese government bonds. However, last year it announced that it would soon become a net seller of government debt to raise the funds necessary to pay out pensions.

This will put upward pressure on interest rates. And rising rates will put additional pressure on the public budget, making even more new debts necessary … a vicious circle indeed.

Why There Will Be
Inflation in the Future

Who will show up to buy this mountain of new debt? International investors?

That’s hard to imagine considering all the strongly rising debt issuance going on around the world.

This leaves the central bank … the buyer of last resort. In other words, I expect the monetization of Japanese government debt to begin very soon.

Then the huge inflationary potential that the fiscal and monetary policies of the past have laid will start to unfold. That’s why I expect the Japanese inflation rate to shoot to the upside during the coming years.

And I see the same possibility ahead for the U.S.

Best wishes,

Claus

Mutual Fund Cash Levels Do Not Support this Rally

by Claus Vogt 01-06-10

As a group, mutual fund managers are as good a contrarian indicator for the stock market as they come. History shows that they hold relatively high cash levels at the beginning of a bull market. Then at the end of a bull market they don’t have much cash since they’re more or less fully invested.

And if you look at mutual fund cash levels in relation to the S&P 500 over the years, as shown in the chart below, you can easily spot this pattern.

High Cash Levels in the 1980s,
Low Cash Levels in 2000

Based on my research, high cash levels of more than 8 percent dominated the early 1980s until the early 1990s. During most of that time stocks were attractively valued, and they staged a huge rally from 1982 to 1987, and again thereafter.

In 1995, when the stock market bubble began, mutual funds’ cash levels started to decline in earnest, falling below 7 percent. By 2000, at the height of the bubble, they had come down to 4 percent. This was close to the low point of 3.9 percent reached in 1972 … at the top of a bull market after which stocks lost nearly 50 percent.

Today we know that March 2000 was the climax of the 1995 bubble. And after going sideways for the rest of 2000, a huge bear market began, and the S&P 500 lost more than 40 percent.

Low Cash Levels in 2007,
And Low Cash Levels Now

Despite those huge losses, cash levels did not rise by much. And after hitting 6.5 percent at the end of 2000, fund managers quickly started to put most of the entrusted money back into the market.

By 2005 cash levels had fallen below the 4 percent boundary. And in the summer of 2007 they hit a record low of 3.5 percent. The market topped shortly thereafter and then lost more than 50 percent!

It takes cash to fund a rally. And right now, mutual funds don’t have much.

Now we’re seeing a similar pattern evolve: Near the stock market’s low in 2009, cash levels reached nearly 6 percent. Then they rolled over sharply and quickly fell back below the 4 percent threshold. They are currently at 3.8 percent.

Low Cash Levels Signal
High Market Risk

Mutual fund cash levels are not a short-term, stock market timing tool. However, they do give us another gauge to compare current market conditions to what has happened in the past.

So are cash levels on their way down to 3.5 percent? Will they reach new historical lows in the coming months? Or is 3.8 percent low enough to signal the end of the current bull move?

No one really knows for sure. But what I do know is that it takes cash to fund a rally. And right now, historically speaking, mutual funds don’t have much of it. To me, that’s a sign of a very risky stock market environment.

In the bigger picture I see the stock market in a secular bear market that began in 2000. And much higher mutual fund cash levels are needed before the next secular bull market can begin.

Best wishes,

Claus

The Fed Fears a New Mortgage Crisis

by Claus Vogt 11-25-09

Although the number was just revised downward, the U.S. economy still expanded by 2.8 percent during the third quarter. So it definitely looks like the recession is history.

What’s more, last Thursday the Conference Board published its Leading Economic Indicator (LEI) for October. This indicator has a strong predictive history, having predicted each recession since the early 1960s as well as the one we’ve just gone through.

Right now the LEI is not forecasting a return of the recession. Quite to the contrary … the October reading was again very strong. Year over year the LEI was up by 4.2 percent, the seventh consecutive increase. And the LEI’s historical record strongly supports a continuation of economic growth during the coming quarter.

With so much good news, I have to ask …

What Does the Fed Fear, Then?

Why are Fed members continually reiterating the current zero percent interest rate policy?

Why are they assuring us that this policy will continue “for an extended period?”

What are they afraid of?

Do they see or know something we don’t?

Why are Fed members sticking to their zero percent interest rate policy?

The past few years have clearly demonstrated that the Fed members didn’t have a clue about the consequences of the real estate bubble, which they themselves inflated. And after the crisis hit, they kept underestimating it at each step along the way.

Moreover, if you had listened to Bernanke and his pals in regards to your personal finances, your losses would be huge!

This sad showing obviously did nothing to shake their self-efficacy or arrogance. They still want us to believe that they are the puppet masters behind the economy — at least in boom times. And during a bust they want us to believe that they alone are in possession of a remedy.

It seems as though they totally lack trust in the free market forces. Instead they desperately want to fix things by decree and money printing.

So why do they keep advertising an ultra lax monetary policy even now, after the economy is starting to recover?

Because They Know Another
Mortgage Mess Is in the Offing

The Fed is well aware of the mortgage reset schedule for the coming years. And they’re probably well aware of a major problem out there, too … a problem at least as severe as the subprime mess.

I’m talking about mortgages like Alt-A and Option-ARMs. A huge wave of resets is due to commence soon.

From the second quarter of 2010 until the fourth quarter of 2011, hundreds of billions of dollars in these mortgages will reset to much higher rates! And many of them will end up becoming delinquent.

Here’s why …

Mortgage resets are bound to increase the number of foreclosures.

Aggravating the situation is the fact that most of these mortgages were taken out when the housing bubble was at its height. So now, the loan-to-value ratios for many homes will be obscenely high.

This means a tsunami of write-downs for the banking sector, probably as huge as the subprime write-downs. And it means a huge wave of foreclosures on borrowers who can’t afford the new, higher monthly payments.

The ability to service a debt does not depend on rising GDP figures. It depends strongly on current income. That’s why high (and rising) unemployment rates are very bad news for the housing market and for the banks — again.

It’s still too early for this unavoidable, mortgage reset problem to derail the banking system and stop the economic rebound in its tracks. We can still be bullish on stocks for some time, as well.

Nevertheless, this looming problem goes a long way in possibly explaining the Fed’s reluctance to return to a more normal monetary policy. And it’s something you should keep in mind.

Best wishes,

Claus

The Sorry State of Modern Economics

by Claus Vogt 11-11-09

Since last year’s collapse of the banking system, hundreds of billions of dollars have been spent to bail out some of the major players. Additionally, governments all over the world, and their central banks, have implemented huge stimulus programs to combat the consequences of the burst real estate bubble.

Economic history is being written right before our eyes. Hence, I refer to this episode as the largest economic experiment since the implementation of communism. And here’s what really frightens me: None of the experimenters saw this crisis coming, but all of them claim to know the remedy!

At the same time politicians and economists are very busy explaining what they deem to be the reasons for the economic malaise …

Speculators, hedge funds, greedy bankers, and lax regulators are said to be responsible. And a lot of talk about a market failure is being presented as the alleged root of this crisis.

Sure, hedge funds, bankers, and regulators certainly played a role. But their reckless behavior is but a symptom of what had been going wrong and was not the cause. And the latter proposition is plain wrong. Let me explain why …

This Crisis Is Not a Market Failure.
It’s a Monumental Policy Failure!

Irrational central bank policies are the source of the current crisis.

By now, nobody — not even Greenspan or Bernanke — will deny that the U.S. housing market was a huge speculative bubble. And the bursting of this bubble triggered the banking problems and the recession.

So we have to look into what causes a speculative bubble to understand the real culprits of the current predicament. The answer is fairly straight forward: Expanding money supply and credit growth.

Since the central bank controls the money supply and credit growth, it’s obvious that the central bank is accountable for the evolution of bubbles and the consequences of their inescapable bursting.

You could easily conclude then, that an unsound monetary policy caused the real estate bubble. That means that the same unsound monetary policy is also accountable for the sad and predictable consequences of the bubble bursting.

Unfortunately we’re not hearing or reading much about this obvious truth. Instead, fairytales about market failure are dominating the media. And an old and cynical policy joke comes immediately to mind: “When the day of reckoning arrives there is but one policy solution: Lying, lying, lying.”

This seems to be the conclusion, the current credo of our politicians and the vast majority of economists. Many of whom are in the business of consulting politicians.

From Economists and Solar Eclipses …

To get a better understanding of what is going on let’s switch to an exemplary story: Suppose we were not dealing with economists but with another breed of scientists, let’s say astronomers. Nearly all of them are using the same theories and models. They’re highly regarded and some have even won the Nobel Prize.

Suddenly something totally unexpected takes place, a total solar eclipse! None of our astronomers had seen this coming. After a short moment of shock and silence, they quickly regain their confidence.

Immediately they start explaining extensively why it had been impossible to predict this eclipse — in spite of the fact that some of their peers had done exactly that, although with an alternative theory.

But the audacity doesn’t stop here. These so-called experts also come up with a variety of necessary measures to make sure that — no more eclipses will happen in the future.

This story illustrates perfectly the sorry state of our current mainly Keynesian-dominated establishment of economists. Their behavior is totally unscientific. And it’s way off track, too.

More Bubbles to Come …

The next crisis will be much more severe than the current one.

As you can see, most politicians and economists haven’t learned anything from the near breakdown of the financial system. More of the same is their dangerous answer, much more.

Right now this policy is showing some desired effect: The housing market has stabilized, the stock market has risen and the economy has been growing again. But this short-term success has a dangerously high price …

Eventually this policy will again fail, like it did before. Already new bubbles are emerging, and the budget deficit is going through the roof! Now, however, the stakes are even larger, much larger. So the next crisis will be much more severe than the recent one.

My job now is to recognize when the current bounce is over and when the next act in this government-fueled crisis will begin. I’m confident that my models will again lead me successfully.

Right now I don’t see signs of renewed weakness. But we must stay constantly on the alert of changes for the worse. The next time down is unavoidable. And the outcome of this great experiment is clear.

Now the only question is: When?

Best wishes,

Claus

Fed Signals “All Systems Go” for More Inflation

by Mike Larson 11-06-09

I have been adamant recently in saying that the Federal Reserve would not … would NOT … signal an end to the easy money environment at this week’s policy meeting. These guys simply lack the political willpower and the inclination to do what’s right. They want to keep the booze flowing to inflate assets, the long-term consequences be darned.

Sure enough, the Fed reiterated Wednesday that it’s not worried at all about the surge in asset or commodity prices. It said,

“Substantial resource slack [is] likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.”

Not only that, the Fed also said it will keep rates low until the cows come home. Specifically, it said that it …

” … continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

The FOMC isn’t worried about inflation.

The only change the Fed did signal? That it’ll buy up to $175 billion in so-called “agency” debt, slightly below its previous target of $200 billion. But it’s still going to buy $1.25 trillion in mortgage-backed securities.

And it’s not buying fewer bonds issued by Fannie Mae and Freddie Mac because it suddenly realized the folly of “monetizing” U.S. debt obligations …

… it’s because of the “limited availability of agency debt” to buy. In other words, the Fed is afraid it’s cornering and distorting the market … which it is!

Never Forget: “Proactive” Is A
Dirty Word in Washington

Why have I been saying you should forget the empty talk you’re hearing about tighter policy? Because action is what counts. And it is abundantly clear to me that the Fed won’t take action until it’s forced to by a dollar crash, a bond market collapse, or some combination of both.

Those events would be important signals that the market has lost confidence in the Fed’s ability to control inflation and in the U.S. government’s willingness to preserve the value of the dollar, necessitating a policy response.

“Proactive” is quite simply a dirty word in Washington. Politicians (and this includes Fed members, no matter how much they like to pretend they’re not political creatures) don’t like to move before a crisis … only after one gives them the political cover to do so.

Indeed, history is clear: Rather than proactively tighten monetary policy in the late-1990s to quell the insane speculation in tech stocks, the Fed ignored the bubble until it gutted the portfolios of millions of investors. Then the Fed ignored the 2003-2006 housing bubble until it ruined the lives of millions of homeowners.

The Fed just told the markets to let the good times roll!

Now, the Fed is doing the same thing again, but on an even grander scale. It’s inflating virtually every asset under the sun — junk bonds, corporate bonds, gold, commodities, stocks, you name it. And rather than proactively taking steps to control the markets … before they get OUT of control … they just told the market this week to let the good times roll!

Regulators, Congress looked the other way while Fannie, Freddie, and mega-banks drove themselves off a cliff!

It’s not just Fed policymakers. It’s the banking regulators and Congress, too!

Look at Fannie Mae and Freddie Mac. People were warning for years that they were taking on too much risk … that they were too thinly capitalized … and that a housing crash would bury them.

But Washington allowed the two agencies to go on their merry way, piling up huge amounts of debt and risk. We all know what happened then: They blew up, requiring tens of billions of dollars in taxpayer-funded bailout money.

Ditto for the banks that were making reckless, high-risk home equity loans, mortgages, and commercial real estate loans. Many observers, including us, were shouting from the rooftops that this would end in disaster.

But rather than shut down the lenders making these loans, or FORCE them to cut back on their risky lending, all the regulators did was issue mealy-mouthed “guidance” letters. The banks ignored them because they had no teeth. And not too long after, those banks began to fall like dominoes.

Bottom line: I don’t LIKE the Fed’s current policy of asset inflation. I know it’s going to end in tears. But until those events I mentioned earlier (currency crash, bond crash, etc.) occur, forcing a change in policy and leading to a shift in momentum, the only thing we can do as individual investors is play along and try to make as much money as possible.

Until next time,

Mike

Your Fall Housing Market Update

by Mike Larson 10-30-09

Every few months for the past couple of years, I’ve made it a point to update you on the state of the housing market. I feel it’s essential to do so because …

• You may be buying, selling, or holding a primary residence or vacation home.

• You probably have a mortgage, and maybe a home equity loan.

• And you’re probably concerned about the broader economy, which the housing and mortgage markets significantly impact.

So where do we stand now?

Well, the stabilization and very mild recovery I first told you was coming back in the spring, continues apace. Sales have generally been picking up. The supply of homes for sale has generally been falling. And prices, while still weak and falling, are not falling as quickly.

The real question is: What happens when the mammoth support that the government is throwing at the market ends?

Used Home Market
Finding Its Footing

In September, existing homes sales hit a level not seen in over two years.

I’ll start with the existing home figures, since that’s the most important part of the market. Most of us own “used” homes and sales of such homes account for around 75 percent to 85 percent of overall transactions in any given month. The latest:

* Sales surged 9.4 percent to a seasonally adjusted annual rate of 5.57 million units in September from 5.09 million in August. That was twice the gain that was expected, and it left sales running at the highest level since July 2007.

* Single-family sales gained 9.4 percent, while condo and cooperative sales rose 9.7 percent. By region, sales climbed across the board, with the Northeast bringing up the rear at +4.4 percent and the West leading at +13 percent.

* Better yet, the raw number of homes for sale dropped 7.5 percent to 3.63 million units from 3.92 million in August. Supply was down 15 percent from a year earlier. That helped push the “month’s supply at current sales pace” indicator of inventory down to 7.8 from 9.3. That’s still higher than the 5-6 month range that’s considered “normal.” But it’s a significant improvement from the double-digit readings we were seeing.

* Pricing is still weak, with the median price of an existing home down 8.5 percent year-over-year to $174,900. But as any good housing analyst will tell you: Pricing lags sales and supply.

Indeed, if you recall what I said in my May 8, Money and Markets column:

“I still believe home prices have further downside. That’s because we remain oversupplied, with approximately 1 million excess housing units for sale in this country. More foreclosure inventory will likely hit the markets in the coming months, too. Reason: Many of the filing moratoriums put in place at the state and industry levels have expired.

“But the sharpest declines in residential real estate are, for now, mostly behind us. I expect to see sales volumes gradually stabilize on a nationwide basis over the coming year, with total inventory for sale (new plus used) gradually coming down. By mid-to-late 2010, we should see pricing stabilize and gradually turn higher, with the improvement coming in stages depending on location.”

Buying New?
Not Lately …

So what about the new home market? It’s taking a bit of a breather. An index put out by the National Association of Home Builders dropped to 18 in October from 19 in September. Builders said present sales, expectations about future sales, and prospective buyer traffic have all declined.

The new home market has slowed down a bit.

Meanwhile, actual sales have missed expectations for two months in a row. They dropped 3.6 percent in September to a seasonally adjusted annual rate of 402,000. Economists were expecting an increase to 440,000 units. Pricing remains weak, with the median price of a new home off more than 9 percent from a year ago to $204,800.

But here’s the thing: The supply picture in the new housing market has dramatically improved!

At the peak of the bubble, builders had 572,000 homes up for sale. That was the highest in U.S. history.

The dramatic cutback in production, combined with a general uptick in sales, has driven that number all the way down to 251,000. We haven’t had this few homes on the market since November 1982, almost 27 years ago.

Surprise, Surprise:
Government Policy Is
Distorting the Market …

Why are we seeing a divergence between the new and existing markets? Like it is in so many other parts of the economy, government policy is distorting things.

You see, the $8,000 first-time home buyer tax credit is set to expire on November 30. It applies to all transactions CLOSED by that date. The typical closing of an existing home takes about 30-60 days. So contracts signed as late as, say, July, August and even early September, are probably okay.

But when you sign a contract to buy a NEW home, unless it’s a “spec” property, you’re buying a plot of land. This means you’re looking at several months to build the house and close. So we got the tax-credit-fueled surge in the new home market EARLIER than the existing home market (June sales rose 7.6 percent, while May sales climbed 7.5 percent).

Since then, some buyers have gotten more reluctant to jump in because they fear they won’t be able to close in time to get their government handout … er … credit.

An extension in the tax credit should keep the housing recovery on track.

But — and this is important — Congress is now talking about extending the credit into 2010. The latest scuttlebutt is that the credit would now apply to all contracts signed through April 30 of next year, with an additional 60 days granted to close the transaction.

Not only that, but it may be expanded so that richer buyers could qualify! If that happens, couples making up to $225,000 would qualify, compared with $150,000 now. Plus it would no longer apply to only first-time buyers. If you’ve lived in your current home for at least five years, you would qualify for a credit of up to $6,500.

Bottom line is that the government’s massive housing and mortgage market support measures show no sign of letting up. In fact,

• The Federal Reserve is still buying $1.25 trillion of mortgage securities to keep rates low.
• The FHA is now backing the same kinds of high-risk loans that blew up private, high-risk lenders, allowing it to capture the largest share of the mortgage market in years.
• The “temporary” increases in the size of mortgages that FHA, Fannie Mae, and Freddie Mac can insure have essentially become permanent.
• And now, just as I forecast, the tax credit/handout is almost sure to be extended well into the future.

You don’t have to like it. Frankly, I don’t. But you do have to appreciate the reality of the situation and understand that it likely will keep the housing recovery on track.

It won’t be a linear process, though. Instead, I foresee more of a “three steps forward, two steps back” scenario.

Until next time,

Mike

October 2009 Update

The volume in the US stock market has declined since the rally started in March 2009.

This is not a good sign as price rises in declining volume indicates weakness and that the big instituitions and big money is not buying the rally since end of march.

In other words its probably mainly dumb money (average investors) that is causing the stock market to rise. This cannot go on forever so we are probably approaching a significant top.
So what this means is right now is not to time to take big risks on buying stocks.

if you do buy, get ready to sell it fast and dont get too greedy.

Gold- short term decline is outlook is there.. but bullish long term term. initial target is gold to $1300

Oil – a decline could happen in a few months and that will be a great buying opportunity as from then on it could rise significantly.

US Dollar – a decline of 50% is waiting for the us dollar in the next few years.(my research shows atleast 2 years of huge pains for the dollar) it has broken technicals of a 15 year chart,so this is quite a significant development, so the trend for the dollar is down so if you want to trade this, buy the opposite side of the dollar.. euro/ commodities/ aussie dollar/ canadian dollar/ gold/ oil .. etc…

Getting Inside the Fed’s Head

by Mike Larson 10-16-09

Every so often, someone decides to pick a fight with me over the Federal Reserve. They say I’ve got it all wrong. They say the Fed is going to prove its mettle. They say that foreign central banks are crying “Uncle” over the dollar, and that this will force the Fed to reverse course and start raising rates.

Folks, that’s just hokum.

Bunk.

Hogwash.

B.S.

Pick whatever term you’re comfortable with!

To those who argue otherwise, I would simply reply that you have to get into the “Fed’s head.” You have to understand what’s driving their approach to policymaking. The underlying principle is this: They are more afraid of a relapse in the economy than any big outbreak in inflation.

Fed Speeches Make it Clear That
Easy Money Is Here to Stay

Gold continues to hit new highs as worried investors dump the dollar.

The Fedheads who are in power right now are Ivory Tower policy wonks. They simply do NOT care that oil prices have more than doubled off their lows … that gold is zooming to new highs almost every day … or that the dollar is circling the drain.

Instead, they’re the type of people who IGNORE market signals like those. They focus on traditional economic indicators, such as figures on capacity utilization, unemployment, and consumer prices.

Don’t believe me? I can’t understand why. Every few days, we get even MORE reinforcing proof that I’m on the right track.

Take Fed Vice Chairman Donald Kohn. He just gave a speech in St. Louis to the National Association of Business Economics. In describing the economy, he had the following nuggets to share …

“The substantial rise in the unemployment rate and the plunge in capacity utilization suggest that the margin of slack in labor and product markets is considerable …

“Businesses have been aggressively cutting costs not only by eliminating jobs, but also by cutting back increases in labor compensation …

“Even as the economy begins to recover, substantial slack in resource utilization is likely to continue to damp cost pressures and maintain a competitive pricing environment. I expect that the persistence of economic slack, accompanied by stable longer-term inflation expectations, will keep inflation subdued for some time …

“The financial headwinds are likely to abate slowly, restraining the economic recovery.”

There’s nary a mention of market signals … nor a hawkish statement among them. Kohn is clearly not “prepping the battlefield,” so to speak, for an interest rate hike.

Or how about St. Louis Fed President James Bullard? He said in a Bloomberg radio interview on Monday that “you want to see the economy start to recover in all its dimensions, output and trade” before you raise interest rates.

Judging by the minutes of their recent meeting, it seems that the Fed just doesn’t care.

In English, that means the Fed won’t raise rates until unemployment starts dropping notably. Bullard went so far as to say that a falling unemployment rate was a “prerequisite” to boosting interest rates.

The problem with that thinking is that unemployment is a lagging indicator. Inflationary pressures could already be building — and the asset markets could already be bubbling out of control — long BEFORE the unemployment rate drops sharply.

Meanwhile, the just-released minutes of the Fed’s late September meeting show that officials were actually considering INCREASING the size of their mortgage purchase program!

The Fed has already committed to buy a whopping $1.25 trillion of mortgage-backed securities to drive rates lower. That version of “quantitative easing” is hammering the dollar, and the market had been looking for a signal the Fed might back off.

So judging from the minutes … the Fed just doesn’t care.

Fed Mantra: Avoid the Great
Depression-Style “Double Dip”

You simply have to understand that the Fed is operating from the “Great Depression” playbook. They’re deathly afraid of a 1937-38 type scenario where, they believe, tighter monetary policy helped contribute to a substantial double dip in the U.S. economy.

This is what I call the “Paul Krugman” view. The Nobel Prize-winning economist (who writes for The New York Times) reiterated in South Korea this week that he thinks it’s way too early to cut back on the “Free Money, Now and Forever” regime. Specifically, he said:

“Under the best of circumstances we’re going to have years before we return to anything that approaches reasonable levels of employment in the major advanced economies … that means staying with these very nonstandard policies for an extended period. It means keeping interest rates close to zero for a very long time.”

The Fed’s irresponsible monetary policies are squeezing the life out of the dollar.

I will tell you flat out that this is going to end in disaster! The Fed has now helped inflate two gigantic asset bubbles with its reckless easy money policies. I have zero doubt they’ll screw it up again — and that things will blow up in our faces … again.

But you simply can NOT jump the gun. The next bust will only occur when policymakers change course, the bond market blows up, or we get, say, a concerted effort to bolster the greenback by virtually every central bank in the world.

I see zero signs of that happening. So as long as that’s the case, and the Kohn-Krugman school of thought is guiding policy in Washington, you have to stick with the carry trade mentality.

That means you can’t really short the stock market for more than a quick trade, and in select special situations. You have to favor emerging market stocks and foreign bonds. You have to write the dollar off. And you have to stick with gold and other hard assets that can hold their value in a free-money regime.

Until next time,

Mike

Commodities Cycles

There are a lot of people, main stream financial media and the government that have interests in seeing gold going down in prices.
Wallstreet does not like high Gold prices.

Over the next 5 years Gold can double to around $2000, ofcourse silver will probably triple or more.

All commodities goes in cycles of approx 20 years and currently it is not the end of the cycle. That is why lot of stock traders and commodity traders like Marc Faber, Jim Rogers study history.
If you look in the stock market crash of 1929 onwards you will see that the market has been very volatile. and the best investments were in Gold and Gold stocks. I dont have all this data right now but I have looked at them few times in the past and it shows that when you have a crash you dont buy all you can.. You buy stocks slowly so you keep your powder dry if there is another crash, so you can again buy.

That is the reason why I bought very slowly early this year, incase we have another market crash and actually I bought my Gold in January and market crashed in March… but because i had such a small amount i did not care.

From the historical data you can find that after the 1930’s crash, stocks increased so many times fold that your investments multiplied many many times. It didnt happen right away. Took many years but after about 10 years, they were all at fantastic levels.

Dollar Index bearish short term

Short Term forecast for the US Dollar is bearish as the support from 2 years ago has broken.

I expect it to fall again for the short term again.

Buy Stocks, Commodities, Foreign Currencies- Euro, AUD

-TNB

Gold Giving Another Strong Buying Signal

by Claus Vogt 10-14-09

In my September 9 Money and Markets column I showed you this gold chart:

Source: www.decisionpoint.com

On that date, I said, “This breakout of a huge triangle is a clear technical buying signal.” I added that the minimum price target of this triangle formation was roughly $1,100. This was well above major resistance in the $1,000 area, thus hinting that another major breakout and buying signal would take place soon.

Well, that’s exactly what happened last week!

Gold Hit 1,059 …
Triggering Another Major Buy Signal

Take a look at the weekly chart below. It gives you a good perspective of how important this breakout to new high ground actually is. As you can see, it signals the end of a medium-term correction that began in March 2008 and the beginning of the next medium-term up trend of a secular bull market that started in 2001.

Source: www.decisionpoint.com

The minimum price target of this huge consolidation pattern is $1,300. And I believe much larger gains are certainly possible.

Also consider this: Four weeks ago the Hulbert Gold Newsletter Sentiment Index (HGNSI) stood at 25.2 percent. Now, four weeks later and gold nearly $100 higher, the HGNSI has actually fallen to as low as 18 percent! A rising market accompanied by a declining number of bulls is a rare development. And it’s clearly bullish.

Longer Term Fundamentals
For Gold Are Very Bullish, Too

There are many fundamental reasons to own gold.

Besides the technical buying signals I’ve given you today, I want to repeat the major fundamental arguments for owning gold:

• As a consequence of the current financial and economic crisis, government debt is going through the roof — not just in the U.S., but all over the world.
• Worldwide central banks are printing money like there is no tomorrow.
• Gold demand is rising due to wealth creation in emerging economies where gold still plays a large role as a store of value.
• Gold demand is even rising in the West as more investors doubt the wisdom of central banks and governments.
• Gold supply is stagnating or even slightly shrinking — despite the metal’s price rise since 2001. This is because it’s getting ever more difficult and expensive to get gold out of the earth.
• Finally, central bankers who were eager to sell government gold at much lower prices a few years ago, are getting increasingly reluctant to keep doing so. Emerging market central banks are even buying.

As long as most of these catalysts for higher gold prices remain in place, I expect the long-term bull market to continue. And much higher highs are very likely.

Best wishes,

Claus

Colleges in MN reporting huge increases in enrollment

Number of colleges here in Minnesota are reporting very high enrollment rates. My guess is the trend is noticed all over the country’s colleges. Not a surprise considering the weak economy.

http://www.startribune.com/local/east/63816602.html?page=1&c=y

Tightening Begins Overseas; Here? Not So Much …

I told you so – TNB

by Mike Larson 10-09-09

Just a couple of weeks ago, I told you what to expect from the U.S. central bank on the interest rate front. Nothing. Absolutely nothing. Not now. And not for a long, long time. The Federal Reserve has made it abundantly clear that the “Free Money” party will keep raging ad infinitum, with all its attendant consequences.

But in a handful of countries overseas, central bankers are actually showing some spine. Unlike the U.S. Fed, they can see that the ocean of cheap, easy liquidity is forming mini-asset bubbles. They realize that the acute phase of the credit crisis is over, making it absolutely unnecessary to maintain “emergency” interest rates. And they’re taking action …

• The Bank of Israel fired the proverbial shot across the market’s bow in August. It raised its base interest rate to 0.75 percent on the 24th of that month from 0.5 percent.
• Indian central bankers have signaled they could soon raise that country’s benchmark reverse repurchase rate from 3.25 percent.
• Speculation is mounting that Bank Indonesia will soon raise its 6.5 percent benchmark rate.
• Ditto for the Bank of Korea and its 2 percent policy rate.

Australia’s central bank raised its key cash rate on Tuesday, indicating that the worst danger for the economy had passed.

And Australia dropped the biggest bomb of all this week …

The Reserve Bank of Australia increased the country’s overnight cash rate by a quarter-point to 3.25 percent, becoming the first “Group of 20″ country to take that step. Private forecasters currently expect the Reserve Bank of Australia to raise rates by a further percentage point in 2010.

Meanwhile, Our Fed Is Singing From
An Entirely Different Hymnal

The message coming out of our officials in this country couldn’t be more different. Here, we’re getting a virtual open-ended promise of government aid and monetary largesse for as far as the eye can see …

• New York Fed President William Dudley just told a Fordham Law School audience that the Fed’s “near-term focus should be to keep significant monetary accommodation in place for an extended period.”
• Boston Fed President Eric Rosengren sang a similar tune a few days earlier. He said, “It’s important that monetary and fiscal policy continue to support the economy until private-sector spending has resumed, and until we are confident that the recovery will continue once the programs that have supported the economy over the past year are removed.”
• And the Federal Open Market Committee’s own statement from its September 23 meeting contained the following, crystal-clear message: “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

The Fed seems determined to let the dollar crash and burn.

The consequences? The U.S. dollar plunged to new cycle lows against the Australian and New Zealand dollars. It got whacked by the Indian rupee, the Singapore dollar, and the Indonesian rupiah. And gold — the ultimate world currency that no central banker can print out of thin air — soared to close at $1,058 yesterday, the highest nominal price level in the history of the world.

The Forecast: More of the Same

From time to time, we’re going to see the dollar bounce. We’re going to see gold sell off. We’re going to hear the occasional throwaway comment from Fed and Treasury officials that they care about the buck.

But we all know the truth. That’s hokum! This is a deliberate campaign to drive down the dollar in order to help reinflate the asset markets. Everyone in Washington knows it. They just won’t talk about it openly!

Here at Money and Markets, though, we don’t mince words. We don’t subscribe to the whole “Fed worship” mentality that seems prevalent on Wall Street. If we see foreign central banks defending and supporting their currencies, while our Fed is doing all it can to throw the dollar under a bus, we’re going to tell you. And we’re going to tell you how to protect yourself. I trust you’d expect nothing less.

Until next time,

Mike

Gold breakout with new high of $1059

Quick note on gold.

It has broken out to the upside. This happened when gold traded above previous high from 2008 which was $1029.

This is very bullish on the shorter to medium term. Right now as im looking at the price it is showing at $1057.

IF you are looking to sell i think it is too early to take profits.It would be better to wait for for somewhere close to $1190 – $1300 to sell.

If you are looking to buy, gold seems a bit extended. I would rather wait for a small pull back to around 1030 – 1040 before buying.

TNB

August pending home sales rise to 2 1/2 year high

You can expect that house prices to fall if there is no extension. Regardless if you are interested in buying a house you should be looking at prospects right now since if the new bill is extended, sales should recover. -TNB

Pending home sales rise for seventh straight month in August to highest level since March 2007

• By Alan Zibel, AP Real Estate Writer
• On Thursday October 1, 2009, 12:31 pm EDT

WASHINGTON (AP) — Aspiring homebuyers rushed to take advantage of a tax credit for first-time owners that expires in November, driving up the number of signed sales contracts for the seventh straight month in August.

AP – In this Sept. 23, 2009 photo, a home with a sale pending is shown in Tallahassee, Fla. The …

Construction spending also rose unexpectedly in August on the biggest jump in housing activity in nearly 16 years, another sign the real estate market is recovering from its four-year slump, data Thursday showed.

Sales and homebuilding are being fueled by a tax-credit of up to $8,000, low mortgage rates and cheap foreclosures. In some of the most hard-hit areas, like Phoenix and Las Vegas, there are bidding wars for deeply discounted properties. And in all but a few cities, home prices are slowly starting to rise, reversing their three-year descent.

To make sure first-time buyers can complete their purchases by the Nov. 30 deadline, real estate agents "have been pushing buyers to sign a contract at least a couple months in advance" according to Abiel Reinhart, an economist with JPMorgan Chase.

More than a dozen bills have been introduced in Congress to extend the credit, but it’s unclear if lawmakers want to continue to subsidize the market.

The National Association of Realtors said Thursday its index of sales agreements rose 6.4 percent from July to 103.8, beating forecasts. It was the highest since March 2007 and 12 percent above a year ago. Economists surveyed by Thomson Reuters expected the index would rise to 98.6.

Typically there is a one- to two-month lag between a contract and a done deal, so the index is a barometer of future sales. However, new rules for home appraisals and rigid lending standards have scuttled many sales agreements recently. In addition, the index may also double-count some buyers who agree to purchase other homes after the first deal falls through.

These factors have made the index a less reliable gauge for completed sales. Despite a steady increase in the number of signed contracts this summer, for example, completed sales actually took an unexpected 2.7 percent dip in August.

"Perhaps the real question is how many transactions are being delayed in the pipeline, and how many are being canceled," Lawrence Yun, the Realtors’ chief economist, said in a statement. "Without historic precedents, it’s challenging to assess."

Pending sales were up 16 percent in the West and 8 percent in the Northeast. They were up 3 percent in the Midwest and nearly 1 percent in the South.

Home prices, meanwhile rose 1.2 percent from June to July, according to the Standard & Poor’s/Case-Shiller home price index of 20 major cities. On a seasonally adjusted basis, prices rose in all but three metro areas, Las Vegas, Detroit, and Seattle.

Housing experts, however, remain divided on whether the price gains signal a definite bottom to the worst housing downturn in decades or just a brief respite from plummeting prices.

Sept. US auto sales fall amid clunkers letdown

A similar effect should happen once the Housing tax credit expires too. -TNB

September US auto sales fall following Cash for Clunkers buying spree over the summer

DETROIT (AP) — GM, Ford and Chrysler reported September sales declines on Thursday, revealing a tough hangover from this summer’s Cash for Clunkers buying spree.

AP – FILE

General Motors Co. reported the steepest drop, 45 percent, when compared with September of last year. Chrysler Group LLC was down 42 percent and Ford Motor Co. had a much smaller decline of 5.1 percent.

But Hyundai bucked the trend, reporting a 27-percent rise in sales last month over a year earlier.

Automakers got a big lift in July and August from clunkers, which spurred sales of nearly 700,000 new cars and trucks. The government program’s big discounts lured in many customers who otherwise would have waited until later in the year to walk into dealerships.

Now automakers are starting to feel the effect. GM said it sold 155,679 vehicles last month compared with 282,806 in September of last year. Ford reported sales of 114,241 in September, but the decline followed two straight months of rising sales. Chrysler sold only 62,197 vehicles last month.

GM blamed the decline on the clunkers program pulling buyers into July and August, weak consumer confidence and low inventory levels during September before production increases could replenish stocks.

"As expected, the market returned to pre-Cash for Clunkers levels in September," Mark LaNeve, GM’s vice president of U.S. sales, said in a statement. "Fortunately the fourth quarter looks brighter."

Ford’s top analyst told reporters on Thursday he does not think the Cash for Clunkers hangover will affect sales in October and beyond.

"I think most part the payback for the program will be minimal in the coming months," George Pipas said. "I don’t think we should be using any excuses. I think from now on the economy stands on its own."

Cash for Clunkers and summertime production cuts kept inventories of popular models low during the month, but even so, Chrysler predicted its market share will rise 0.8 percentage points from August levels. The company increased factory output to replenish supplies.

"While we had some bright spots in September, it was still a challenging sales environment for the industry," Peter Fong, CEO of the Chrysler brand, said in a statement.

Sales of Ford’s popular F-series trucks rose 3.5 percent, while sales of the new 2010 Taurus sedan increased more than 60 percent.

Ken Czubay, Ford’s vice president of U.S. marketing and sales, said that could be a key indicator that pickup sales are starting to recover among core buyers who need them for work, and it may be an early indicator that small business owners are experiencing a turnaround.

"It’s two months in a row of F-series sales increases for us," Czubay told reporters during a conference call. "It’s not the large commercial purchases, it’s more the individual."

The F-series trucks usually are the top-selling vehicle in the U.S.

The September results fell 37.2 percent from August totals, which were boosted by the government’s Cash for Clunkers program. Two of Ford’s vehicles — the Focus and Escape — were top sellers in the program that ran during July and August and offered big discounts to buyers.

Sales of the those vehicles posted steep declines from from August to September. Focus fell 64.1 percent from August, when Ford sold 25,547 of the small, fuel efficient cars. The company sold 9,182 in September.

The Escape crossover posted a month-over-month sales decline of 58.5 percent, with Ford selling 8,692 of the vehicles last month, compared to 20,933 August sales.

Chrysler also saw a slowdown between August and September. The company’s sales fell by a third to 62,197 from 93,222 in August.

South Korean automaker Hyundai’s sales jumped on easy comparisions to a weak year-ago period and strong demand for its Elantra and Santa Fe models.

Automakers sold a combined 1.3 million vehicles in August for a seasonally adjusted sales rate, or SAAR, of 14.1 million. Many analysts expect a SAAR of 9.3 million for September.

Shares of Ford fell 19 cents, or 2.6 percent, to $7.02 in afternoon trading.

Fed Promises Easy Money for an Extended Period

by Claus Vogt 09-30-09

Every few weeks the world’s most powerful and influential central bankers — those in charge of the world’s number one reserve currency, the U.S. dollar — come together in what’s called the Federal Open Market Committee (FOMC).

They discuss the economy, interest rates, financial markets and whatever else they deem important. Then they decide to set the Federal Funds Rate at a level they think is appropriate.

And last week was their week. So today I want to analyze what their decisions mean for the stock market and for you as an investor.

The Fed Statement Reassures
A Very Lax Monetary Policy …

The FOMC meets regularly to decide where to set the Federal Funds Rate.

After each FOMC meeting, the Fed releases a statement. And the one for September 23, 2009, is very telling in my opinion. Here’s its most important part:

“The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

As you can see, the Fed is promising a continuation of its extremely lax monetary policy “for an extended period.” So all the recent media talk about a soon-to-begin exit strategy or a normalization of monetary policy was obviously premature. The Fed is reassuring us that there will be easy money for as far as the eye can see.

Why?

Two reasons come to mind:

First, the Fed is still very concerned about the economy … the employment situation is dire … and a double-dip recession is a real possibility.

Second, and more important, is that they know how precarious the banking situation still is. They know that the bad debt problems have not been solved … that most banks would go bankrupt if they had to implement mark-to-market rules … and that the banking system is still on life support.

This Is Important News
For the Stock Market

Since the Fed is confronted with two major problems — a shaky economy and an unstable banking system — it’s not worrying about a possible stock market bubble in the making.

Why is this so important?

Just look at the charts below. The stock market has rallied some 60 percent since the March low. But earnings are still very depressed. Hence the classic version of the P/E ratio — using twelve months trailing GAAP earnings — shot to the stratosphere!

Source: www.decisionpoint.com

Twelve-month trailing earnings as of the first quarter 2009 were a mere $6.86 for the S&P 500 making for a P/E ratio of 154. According to Standard and Poor’s, these earnings are estimated to rise to $7.51 in the second quarter, and $7.61 in the third quarter. Then they’re expected to jump to $39.35 in the fourth quarter and $43.58 in the first quarter 2010. Based on this last figure the P/E ratio will decline to 24.

Historically the normal range for this very P/E ratio — based on 12-month trailing GAAP earnings — has been between 10 (undervalued) and 20 (overvalued). Hence even if the corporate sector will see the estimated jump in earnings, the stock market is still very expensive.

Classic stock market valuation metrics show that this is a highly overvalued market. And overvalued markets can stay overvalued for a long time and even become more overvalued — as long as the Fed does not take away the proverbial punch bowl.

This means one of two things …

We’re Witnessing the Next Bubble, Or
Earnings Have to Increase Dramatically!

Fed chief Bernanke’s inflationary stance could be the fuel that ignites the next stock market bubble.

Right now I can’t rule out either one. I do, however, lean towards the first. And in reading the Fed’s FOMC statement one thing becomes obvious: If we’re on our way to a new stock market bubble the Fed will not prick it any time soon.

The September 23 statement that I cited earlier is as clear as you can expect from the Fed. Much clearer than anything Greenspan said during his long reign. His famous “irrational exuberance” speech, which was never followed by any action, is a perfect example.

Bernanke is much different …

From the very beginning of his career at the Fed he made it known that he’s a first class inflationist, and he strongly believes prosperity can be achieved by printing money. Now the Bernanke Fed is clearly reiterating this inflationary stance. By doing so the Fed is rubberstamping the current stock market rally and apparently not worrying about a possible bubble!

There is an old Wall Street saying: “Don’t fight the Fed.” I think it’s wise to heed it in today’s environment.

Best wishes,

Claus

Bernanke’s Grand Strategy …

This article is suggesting the feds will not raise rates by the end of the year but it counters the trend of rising interest rates
(borrowing/lending) in recent weeks.

Even 12month CD rates are up. Taking ING as an example, they reversed their year long trend of CDs giving lower rates than their regular savings account (whose rates would dip a month after the new cd rate was updated).

Bernanke may be a scholar but he’s not going to destroy the value of the dollar because the repurcussions are huge and that would hasten the arrival of a global currency ie. End of the Western Civilization.

Either that or a war with Iran or some International conflict will drive investors to the dollar as a safe haven.

On 9/28/09, Tseten B wrote:
> by Larry Edelson on > September
> 28, 2009 at 8:30 am
> [image: Larry Edelson]
>
> By now it should be abundantly clear to you that my warnings are coming to > pass. Gold is acting firm, having made a new 12-month high above $1,000 an > ounce, and within a whisker of a new record high.
>
> And while it might not fully blast off yet, in time, it will — to well over > $2,000 an ounce … then even higher to $3,000 … and ultimately, probably by > the middle of the next decade, even to $5,000.
>
> Meanwhile, the U.S. dollar has sunk to a new 12-month low and is a mere 7 > percent above its record low reached in July 2008.
>
> It won’t take much for the dollar to start plunging, almost out of control. > A brief rally here and there, yes. But the long-term trend for the dollar > isdown, down, DOWN.
>
> Why am I so sure of it? Well, in addition to all of the reasons and all of > the material I’ve already written on the subject, consider the press > release
> issued from last week’s Federal Open Market Committee Meeting (FOMC). >
> The Fed signaled that the emerging signs of life in the U.S. economy are > simply not enough for it to stop printing money.
>
> So instead of letting market forces unfold naturally, the Fed will continue > to engage in “asset purchases” to help the economy “return to higher levels > of resource utilization.”
>
> That’s Fed-speak for printing money … monetizing debts … and reinflating > asset prices. The Fed is also extending its (largely phony) end-date for > printing money, from December to March.
>
> It also acknowledged that it will keep its Fed Funds interest rate in the > range of zero to 0.25 percent for an “extended period.”
>
> If you think extended period means a few more months, or even six months > before the Fed raises rates, think again.
>
> And if you think the Fed is worried about the sinking value of the dollar > as
> a result of all this, then you’ll be even more surprised.
>
> In fact, let me tell you a few things about our Fed Chairman. *Every move > he
> is making is part of his grand strategy to avoid the policy mistakes he > believes were made in the 1930s that caused the Great Depression.* >
> Bear in mind, I have read every paper ever published by Mr. Bernanke. I’ve > studied him more thoroughly than I have any U.S. central banker in history, > including his predecessor Alan Greenspan.
>
> So what I am about to tell you can serve to help guide you in the months > and
> years ahead to understand how Bernanke thinks and what kind of policy > decisions he will likely be making.
>
> Let’s get started …
>
> *Bernanke Belief #1: Monetary Policy Was Overly Tight at the Outset of the > Great Depression. Ergo, Keep Interest Rates Low Today to Avoid Another > Depression.*
>
> Bernanke believes that in the spring of 1928 and in the absence of any > signs
> of inflation, the Federal Reserve unjustifiably raised its discount rate > from 4 percent to as high as 6 percent in 1929 *with the explicit aim of > deliberately pricking the stock market bubble*.
>
> While it succeeded, ultimately the tight money move backfired. Instead of > the stock market bubble bursting naturally of its own weight and > overvaluations, the stock market imploded.
>
> Naturally, once the stock market bubble burst in 1929, the Fed started > lowering rates, all the way down to 1.5 percent by October 1931. But then > the Fed made yet another tight money blunder, doubling rates within the > next
> four months to 3 percent by February 1932, and in the absence of any signs > of an economic recovery.
>
> In Ben’s mind, the Fed engaged in overly tight monetary policy from 1929 to > 1932, turning what would otherwise have been a fairly normal recession into > a depression. The tight monetary policy had two effects …
>
> 1. It killed off any possibility of a recovery, by raising short-term rates > above market rates.
>
> 2. Importantly, the higher rates artificially boosted the value of the > dollar in international markets, importing deflation.
>
> So what is Ben’s thinking today? Keep rates as low as possible and don’t > even dare think about raising them until there are plenty of signs of a > rock
> solid economic recovery. Furthermore, don’t dare make any moves that will > strengthen the dollar, for fear of importing deflation.
>
> Keep that latter point in mind because it’s going to re-emerge in Ben’s > thinking when we look at how he viewed the latter stages of the Great > Depression, and particularly, the dollar.
>
> *Bernanke Belief #2: Encouraging Bank Failures Was A Disastrous Policy > During the Great Depression. Ergo, Do Not Encourage Failures Today.* >
> In the aftermath of the 1929 Crash, not surprisingly, as dollars were being > cashed out of stocks, bonds, and many other dollar-denominated assets > (excluding gold, which was hoarded), the supply of money and credit in the > U.S. began to implode, and banks began to fail.
>
> But the Fed and the Treasury did not want weak banks to stay in business. > Treasury Secretary Andrew Mellon actually publicly called for weak banks to > close their doors.
>
> But that policy clearly backfired, causing a banking panic, which saw more > than 11,000 banks go bust by 1932. And it also started to drain the country > of its gold reserves, which — because of the gold standard at the time — > further caused the supply of money and credit to contract, in a virtually > non-stop freefall.
>
> Bernanke thinks encouraging financial institution failures was the wrong > policy, a major blunder — especially so since *in the 1930s there were no > safeguards in place for depositors — the innocent victims of bank > failures*.
> * Not one. There was no depositor insurance whatsoever.*
>
> Today, we have FDIC insurance and other safeguards to protect innocent > investors and savings. *But Mr. Bernanke still believes that encouraging > banks to fail is the wrong policy.*
>
> Why? Because he knows darn well that there is no way depositors can be > protected, even today, if a mass banking panic were to spread throughout > the
> country. Washington simply does not have the resources to control an > all-out
> panic.
>
> Bottom line: Do not expect to see Bernanke encourage bank or broker > failures, other than Lehman Brothers last year. His views on this have not > changed regarding today’s great financial crisis. Nor are they likely to > change.
>
> *Bernanke Belief #3: Tight Money Policy Yet Again, in 1932, Was Disastrous > for the Economy. Ergo, Keep Rates As Low As Possible for As Long As > Possible
> Today.*
>
> In February 1932, after seeing the devastation to the economy that the high > interest rate policy caused, the Fed suddenly reversed course and dropped > the discount rate from 3.0 percent back to 2.5 percent in June, just four > months after raising rates.
>
> That was a smart move. But they botched it up again. Just nine months > later,
> in March 1933 — under strong pressure from Congress — the Fed cranked rates > back up one full point from 2.5 percent to 3.5 percent. Again, in the > absence of any solid data that the economy was recovering. >
> The result? The economy immediately took yet another devastating plunge, > taking down thousands more banks with it, and causing unemployment to soar > past 25 percent.
>
> What will Ben do today? It’s pretty clear: He’s not likely to raise > interest
> rates for quite a long time, until well after the economy has cleared the > crisis stage and is solidly back on firm footing. That could be a year from > now, or, even longer.
>
> *Bernanke Belief #4: Vigorously Defending the Dollar — Via Protecting the > Gold Standard Come Hell or High Water — Was the Biggest Mistake of All.* >
> Bernanke’s major conclusion is that almost all policy initiatives taken by > Congress and the Federal Reserve during the Great Depression were designed > based on one underlying motive: To protect the dollar and its underlying > gold reserves, at all costs. Even at the cost of causing a Depression and > 25
> percent unemployment.
>
> But that policy, according to Bernanke, had devastating unintended > consequences.
>
> Foreign countries around the world — worried that they were going to lose > gold reserves to the higher interest rates offered in the U.S. at the time > —
> began to competitively raise interest rates to defend their own gold > reserves, without any concern whatsoever for deteriorating economic > fundamentals.
>
> Hence, a worldwide race toward higher interest rates broke out in the early > 1930s, causing the entire globe to sink into a major economic depression > that became self-fulfilling and self-perpetuating.
>
> Furthermore …
>
> *Bernanke Belief #5: The Longer a Country Defended Its Currency — Via > Defending Its Gold Reserves — the Worse the Depression.*
>
> In one of his most important papers, published in October 1990 — “The Gold > Standard, Deflation and Financial Crisis In the Great Depression: An > International Comparison ” — Bernanke > puts
> all the cards on the table from his years of studying the Great Depression, > with the following two conclusions …
>
> 1. Supporting the dollar via the direct and indirect actions taken to > vigorously defend the gold standard was the single most important factor > causing the Great Depression.
>
> And …
>
> 2. The sooner a country abandoned the gold standard during the Great > Depression — and effectively devalued its currency — the faster the > economic
> recovery.
>
> *ERGO, TODAY, DO NOTHING TO SUPPORT THE DOLLAR AND INSTEAD, LET THE DOLLAR > FALL AS QUICKLY AS POSSIBLE TO HOWEVER LOW THE FREE MARKET FORCES TAKE IT, > NO MATTER WHAT.*
>
> You now know pretty much how Bernanke thinks. The only questions that > remain
> are …
>
> 1. Will his policies work?
>
> 2. Or will they backfire?
>
> 3. What unintended consequences might there be?
>
> 4. How does one protect their wealth and profit from Bernanke’s views and > likely actions regarding the economy, the dollar, interest rates? >
> I’d love to hear from you on the above questions, via my personal > blog.
> Just click here to give > me your comments!
>
> And click here to > become a savvy investor and to take advantage of these markets by becoming > a
> member of my *Real Wealth
> Report* > .
>
> Best wishes,
>
> Larry
>

Bernanke’s Grand Strategy …

by Larry Edelson on September 28, 2009 at 8:30 am

By now it should be abundantly clear to you that my warnings are coming to pass. Gold is acting firm, having made a new 12-month high above $1,000 an ounce, and within a whisker of a new record high.

And while it might not fully blast off yet, in time, it will — to well over $2,000 an ounce … then even higher to $3,000 … and ultimately, probably by the middle of the next decade, even to $5,000.

Meanwhile, the U.S. dollar has sunk to a new 12-month low and is a mere 7 percent above its record low reached in July 2008.

It won’t take much for the dollar to start plunging, almost out of control. A brief rally here and there, yes. But the long-term trend for the dollar isdown, down, DOWN.

Why am I so sure of it? Well, in addition to all of the reasons and all of the material I’ve already written on the subject, consider the press release issued from last week’s Federal Open Market Committee Meeting (FOMC).

The Fed signaled that the emerging signs of life in the U.S. economy are simply not enough for it to stop printing money.

So instead of letting market forces unfold naturally, the Fed will continue to engage in “asset purchases” to help the economy “return to higher levels of resource utilization.”

That’s Fed-speak for printing money … monetizing debts … and reinflating asset prices. The Fed is also extending its (largely phony) end-date for printing money, from December to March.

It also acknowledged that it will keep its Fed Funds interest rate in the range of zero to 0.25 percent for an “extended period.”

If you think extended period means a few more months, or even six months before the Fed raises rates, think again.

And if you think the Fed is worried about the sinking value of the dollar as a result of all this, then you’ll be even more surprised.

In fact, let me tell you a few things about our Fed Chairman. Every move he is making is part of his grand strategy to avoid the policy mistakes he believes were made in the 1930s that caused the Great Depression.

Bear in mind, I have read every paper ever published by Mr. Bernanke. I’ve studied him more thoroughly than I have any U.S. central banker in history, including his predecessor Alan Greenspan.

So what I am about to tell you can serve to help guide you in the months and years ahead to understand how Bernanke thinks and what kind of policy decisions he will likely be making.

Let’s get started …

Bernanke Belief #1: Monetary Policy Was Overly Tight at the Outset of the Great Depression. Ergo, Keep Interest Rates Low Today to Avoid Another Depression.

Bernanke believes that in the spring of 1928 and in the absence of any signs of inflation, the Federal Reserve unjustifiably raised its discount rate from 4 percent to as high as 6 percent in 1929 with the explicit aim of deliberately pricking the stock market bubble.

While it succeeded, ultimately the tight money move backfired. Instead of the stock market bubble bursting naturally of its own weight and overvaluations, the stock market imploded.

Naturally, once the stock market bubble burst in 1929, the Fed started lowering rates, all the way down to 1.5 percent by October 1931. But then the Fed made yet another tight money blunder, doubling rates within the next four months to 3 percent by February 1932, and in the absence of any signs of an economic recovery.

In Ben’s mind, the Fed engaged in overly tight monetary policy from 1929 to 1932, turning what would otherwise have been a fairly normal recession into a depression. The tight monetary policy had two effects …

1. It killed off any possibility of a recovery, by raising short-term rates above market rates.

2. Importantly, the higher rates artificially boosted the value of the dollar in international markets, importing deflation.

So what is Ben’s thinking today? Keep rates as low as possible and don’t even dare think about raising them until there are plenty of signs of a rock solid economic recovery. Furthermore, don’t dare make any moves that will strengthen the dollar, for fear of importing deflation.

Keep that latter point in mind because it’s going to re-emerge in Ben’s thinking when we look at how he viewed the latter stages of the Great Depression, and particularly, the dollar.

Bernanke Belief #2: Encouraging Bank Failures Was A Disastrous Policy During the Great Depression. Ergo, Do Not Encourage Failures Today.

In the aftermath of the 1929 Crash, not surprisingly, as dollars were being cashed out of stocks, bonds, and many other dollar-denominated assets (excluding gold, which was hoarded), the supply of money and credit in the U.S. began to implode, and banks began to fail.

But the Fed and the Treasury did not want weak banks to stay in business. Treasury Secretary Andrew Mellon actually publicly called for weak banks to close their doors.

But that policy clearly backfired, causing a banking panic, which saw more than 11,000 banks go bust by 1932. And it also started to drain the country of its gold reserves, which — because of the gold standard at the time — further caused the supply of money and credit to contract, in a virtually non-stop freefall.

Bernanke thinks encouraging financial institution failures was the wrong policy, a major blunder — especially so since in the 1930s there were no safeguards in place for depositors — the innocent victims of bank failures. Not one. There was no depositor insurance whatsoever.

Today, we have FDIC insurance and other safeguards to protect innocent investors and savings. But Mr. Bernanke still believes that encouraging banks to fail is the wrong policy.

Why? Because he knows darn well that there is no way depositors can be protected, even today, if a mass banking panic were to spread throughout the country. Washington simply does not have the resources to control an all-out panic.

Bottom line: Do not expect to see Bernanke encourage bank or broker failures, other than Lehman Brothers last year. His views on this have not changed regarding today’s great financial crisis. Nor are they likely to change.

Bernanke Belief #3: Tight Money Policy Yet Again, in 1932, Was Disastrous for the Economy. Ergo, Keep Rates As Low As Possible for As Long As Possible Today.

In February 1932, after seeing the devastation to the economy that the high interest rate policy caused, the Fed suddenly reversed course and dropped the discount rate from 3.0 percent back to 2.5 percent in June, just four months after raising rates.

That was a smart move. But they botched it up again. Just nine months later, in March 1933 — under strong pressure from Congress — the Fed cranked rates back up one full point from 2.5 percent to 3.5 percent. Again, in the absence of any solid data that the economy was recovering.

The result? The economy immediately took yet another devastating plunge, taking down thousands more banks with it, and causing unemployment to soar past 25 percent.

What will Ben do today? It’s pretty clear: He’s not likely to raise interest rates for quite a long time, until well after the economy has cleared the crisis stage and is solidly back on firm footing. That could be a year from now, or, even longer.

Bernanke Belief #4: Vigorously Defending the Dollar — Via Protecting the Gold Standard Come Hell or High Water — Was the Biggest Mistake of All.

Bernanke’s major conclusion is that almost all policy initiatives taken by Congress and the Federal Reserve during the Great Depression were designed based on one underlying motive: To protect the dollar and its underlying gold reserves, at all costs. Even at the cost of causing a Depression and 25 percent unemployment.

But that policy, according to Bernanke, had devastating unintended consequences.

Foreign countries around the world — worried that they were going to lose gold reserves to the higher interest rates offered in the U.S. at the time — began to competitively raise interest rates to defend their own gold reserves, without any concern whatsoever for deteriorating economic fundamentals.

Hence, a worldwide race toward higher interest rates broke out in the early 1930s, causing the entire globe to sink into a major economic depression that became self-fulfilling and self-perpetuating.

Furthermore …

Bernanke Belief #5: The Longer a Country Defended Its Currency — Via Defending Its Gold Reserves — the Worse the Depression.

In one of his most important papers, published in October 1990 — “The Gold Standard, Deflation and Financial Crisis In the Great Depression: An International Comparison” — Bernanke puts all the cards on the table from his years of studying the Great Depression, with the following two conclusions …

1. Supporting the dollar via the direct and indirect actions taken to vigorously defend the gold standard was the single most important factor causing the Great Depression.

And …

2. The sooner a country abandoned the gold standard during the Great Depression — and effectively devalued its currency — the faster the economic recovery.

ERGO, TODAY, DO NOTHING TO SUPPORT THE DOLLAR AND INSTEAD, LET THE DOLLAR FALL AS QUICKLY AS POSSIBLE TO HOWEVER LOW THE FREE MARKET FORCES TAKE IT, NO MATTER WHAT.

You now know pretty much how Bernanke thinks. The only questions that remain are …

1. Will his policies work?

2. Or will they backfire?

3. What unintended consequences might there be?

4. How does one protect their wealth and profit from Bernanke’s views and likely actions regarding the economy, the dollar, interest rates?

I’d love to hear from you on the above questions, via my personal blog. Just click here to give me your comments!

And click here to become a savvy investor and to take advantage of these markets by becoming a member of my Real Wealth Report.

Best wishes,

Larry

Dollar crashes against yen!

by Martin D. Weiss, Ph.D. 09-28-09

Martin here with an urgent update on the dramatic events that took place late last week and what they could ultimately mean for you …

Just when the worldwide onslaught against the U.S. dollar seemed to be temporarily subsiding, a new round of attacks hit Friday — this time from Japan.

On August 30, in a landslide election victory that shook the world, the left-of-center Democratic Party of Japan derailed the ruling party and swept a new leader to power, Yukio Hatoyama. It was the most significant tipping point in that country’s politics since 1955.

Now, 30 days later, we are starting to see the repercussions for the U.S. dollar: For the first time in decades, the new Japanese regime is effectively giving up supporting the greenback in the currency markets!

The consequences are immediate: Just this past Thursday, the U.S. dollar could buy 91.27 Japanese yen. By the end of the day Friday, it could only buy 89.63 yen.

In just 24 hours, the dollar fell by 1.81 percent, more that it would typically fall in 24 DAYS!

But if you think the dollar decline is far removed from your daily life, think again.

The Dollar Decline Could Deliver
A Major Blow to Your Wealth

Right now, American households own $67.2 trillion in assets, including stocks, bonds, and real estate.

Here’s the key: If measured in terms of Japanese yen, just between the close of business Thursday and close of business Friday …

Over one trillion dollars in American wealth was wiped off the map! All in just 24 hours!

Unfortunately, most people have no idea this is happening, and even if they did, no sense of how it could impact them. Their typical reaction:

“I don’t care how much the dollar is falling in Japan, Europe, or any other country. All that concerns me is what happens with my money right here in the United States.”

But there are four fatal flaws to this rationale:

Fatal Flaw #1. Your money isn’t just falling in far-away markets. It’s falling everywhere.

When the value of your money crashes globally, it also falls domestically.

Already, the cost of more than 90 percent of the products sold at Wal-Mart (all produced overseas) is being impacted.

Already, the vast majority of products sold in electronics stores, furniture stores, and appliance stores are being affected.

Ditto for the lion’s share of the oil, gasoline, and heating oil you buy.

So when the dollar falls, you ultimately pay.

Fatal Flaw #2. Your money isn’t really yours. A lot of it is actually theirs.

It’s been loaned to America by the very same foreign countries where the dollar is falling the fastest — Japan, China, the eurozone, and other countries. And it’s being loaned to America …

To finance the massive $1.58 trillion federal budget …

To fund our addiction to debt …

And to once again fuel the borrow-and-spend binging that helped create the financial crisis in the first place.

Fatal Flaw #3. When they want their money back, they GET it back.

When foreign central banks and investors want to pull their money out, they don’t have to grovel to the U.S. Treasury Department or wait on line at the Fed. They merely issue sell orders to liquidate their U.S. investments, convert them into cash, and exchange them for other currencies.

So far, this process has typically been orderly, with no panic. But if the action in the Japanese yen on Friday is any indication, it may not stay that way for long.

Fatal Flaw #4. They can sink YOUR investments.

The more the dollar falls, the more they want to sell. And the more they sell, the further the dollar falls.

But dollars aren’t sold in a vacuum. Whenever foreign investors and governments sell U.S. our dollars, they’re also selling U.S. stocks, bonds, and real estate.

And that’s how it comes back to bite ordinary Americans on the rear end, causing potentially big losses in the $67.2 trillion of household wealth.

The Unfathomable Risk
Our Leaders Are Taking

The U.S. dollar is not going to die. But our leaders are taking an unfathomable risk with our money and our destiny as a nation.

Every time we run budget deficits, we must go, hat in hand, asking for money from central banks and investors in Asia, Europe, and even Latin America.

Every time we run a trade deficit, spending more on imports than we earn on exports, we run back for still more money from Asians, Europeans, and Latin Americans.

And now, after thousands of such trips and billions of such transactions, the U.S. now has a total of $7.9 trillion in liabilities to foreigners.

Why It’s Now Far More Difficult to
Postpone the Day of Reckoning

Until recently, we were able to continually postpone our day of reckoning as a nation.

The U.S. dollar was king, the only reserve currency. And the U.S. financial market was the only game in town big enough to satisfy the needs of overseas investors. So they had to keep most of their money in dollars, whether they liked it or not.

They had no choice.

Whenever they lost faith in other countries — Argentina, South Africa, Thailand, or even a country like Great Britain — they could pull out along with hoards of others, sending those financial markets into a tailspin. But when the United States made similar mistakes, it got away with it.

And so it was that we merrily ran huge deficits, borrowed to the hilt, and continued to party as if nothing were wrong. And that’s why, despite it all, overseas investors continued to pour more and more money into America.

In the 1980s, it was primarily cash-rich Japanese who led the way, investing billions in U.S. stocks and bonds, helping to lift the Dow and Treasuries out of their worst slumps of the postwar era.

In the 1990s, it was mostly Germans who played that role, helping to drive the big tech boom.

And in the 21st century, China has become the big provider of new funds to the U.S.

But now all of this is changing and we’re nearing the end of the line:

• Foreign central banks have sought — and begun to find — viable alternatives to the U.S. dollar as a reserve currency.
• China and others have pushed progressively harder to replace the dollar with a basket of currencies.
• The United Nations has proposed a similar scheme, creating a new monetary system.
• And this past week, as I mentioned at the outset, even Japan, America’s staunchest and richest financial ally, is beginning to abandon its long support for the U.S. dollar.

But U.S. authorities remain conspicuously complacent. Despite rhetoric supporting the greenback, both the U.S. Treasury and the Federal Reserve have actively pursued policies that merely sink the U.S. dollar further — a national debt that will grow by $9 trillion by 2019 … and massive money printing to finance it.

Clearly, our government can think of no better response to the new pressures than to flood the world with still cheaper dollars.

Time for Action

Many years ago, my father tried to protect the U.S. dollar, and prevent it from declining.

He founded the Sound Dollar Committee.

He enlisted the support of men like Bernard Baruch who was the former adviser to many presidents … Herbert Hoover, the former president who presided over the worst of times … and Bill Martin, who was Chairman of the Federal Reserve.

He organized a massive grassroots campaign to balance the budget, fight inflation, and protect the American dollar.

He helped President Eisenhower achieve one of the few solid, balanced budgets of the 20th century. And he won several landmark battles for the dollar. But he lost the war.

Today, I am the Chairman of the Sound Dollar Committee and I wish I could accomplish as much as Dad did to stop the dollar’s decline. But the forces driving it down are too powerful; our leaders, too complacent.

Thus, today, my primary course of action is different and I will tell you more about what I’m doing next month.

Right now, however, your first urgent step must be to defend yourself from this madness with the investments we’ve been recommending that go up when the dollar falls.

Your second step: To go on the offensive, aiming for the unusual wealth-building profits that only crises like these can generate.

Stand by for further instructions.

Good luck and God bless!

Martin

Medium term outlook has high risk for Inflation

by Martin D. Weiss, Ph.D. 09-21-09

Step by step, with little fanfare and great complacency, we are witnessing a fundamental, global shift that’s rapidly transforming the investment scene:

The forces of deflation are temporarily receding; and in the meantime, the forces of inflation threaten to roar back with a vengeance.

They are everywhere. They could be overwhelming. They must NOT be ignored …

Inflationary Force #1
Never-Ending, Out-of-Control
U.S. Federal Deficits

As Larry Edelson explained here one week ago:

• Through August, the federal deficit hit $1.38 trillion, or three times last year’s all-time record deficit of $454.8 billion. And in September alone, the administration expects another $200 billion in red ink, bringing the total for the year to $1.58 trillion.
• The U.S. government’s official debt is now at an all-time high of $11.8 trillion, or over $100,000 for each and every household in America.
• Both the administration and its opponents agree that, over the next 10 years, the cumulative federal deficit will be another $9 trillion, driving the burden per household up to $177,000.
• The Federal Reserve is also in hock up to its eyeballs, with more than $2 trillion in liabilities on its balance sheet. That brings the total burden up to $194,000 per household.
• Perhaps worst of all, the government’s unfunded obligations for Social Security, Medicare, and Federal pension payments are also ballooning higher and now stand at an estimated $104 trillion, or $886,000 per household.

Total burden per household: More than $1 million!

This is, by far, the largest federal deficit in U.S. history — in proportion to household income … in comparison to the nation’s population … or even as a percent of the total economy (other than during major World Wars).

It drives the Fed to print money without restraint. It pumps up demand for scarce goods. And in the months ahead, it’s bound to be the single most powerful pressure point on public policy, financial markets, the U.S. dollar and … inflation.

Inflationary Force #2
New Lows in the U.S. Dollar

Last week, the U.S. dollar sunk to a new, one-year low against a basket of major currencies.

It’s just five points away from its lowest level in history.

And, as Mike Larson detailed this past Friday, the U.S. dollar is now being driven lower by a new, unprecedented factor:

For the first time since 1933, it is now cheaper to borrow dollars than Japanese yen. Indeed, the three-month London Interbank Offered Rate (LIBOR) on the U.S. dollar has slumped to a meager 0.292 percent, while the equivalent rate on the Japanese yen is 0.352 percent.

This means that, instead of using Japanese yen to finance the carry trade — borrowing low-cost money to buy high-yielding investments — international investors will now start using U.S. dollars to finance the carry trade.

It means that, instead of the dollar being a magnet for frightened money, it is becoming precisely the opposite — a source of financing for the risk trade.

Most important, it means that, instead of buying dollars, they have every incentive to borrow dollars and promptly SELL them in order to purchase the higher yielding instruments.

End result: More momentum to the dollar’s decline.

Inflationary Force #3
U.S. Household Wealth
Now Expanding Again

For nearly two years, U.S. households were continually losing wealth. They lost trillions in stocks, bonds, insurance policies, real estate. And these losses, in turn, emerged as a major deflationary force, driving consumer price inflation to zero or lower.

Now, however, in the second quarter of 2009, that trend has reversed.

According to the Fed’s Flow of Funds released just last week, in just the last three months, U.S. households have enjoyed wealth gains of

• $1.1 trillion common and preferred stocks
• $494 billion in mutual funds
• $157 billion in real estate

These gains are still far from enough to recoup the peak asset levels of 2007. But the change in trend is enough to rekindle inflation, and that inflation is likely to take most economists by surprise.

Inflationary Force #4
Exploding U.S. Money Supply

Money pouring into the economy and chasing scarce goods is the classic cause of inflation.

But throughout 2007 and much of 2008, there was no growth whatsoever in U.S. money supply (M1).

During that period, despite the Fed’s efforts to shove interest rates down to practically zero, the total amount of money outstanding remained under $1.4 trillion — another deflationary force.

Now, however, as you can see in this chart provided by www.Shadowstats.com, the outlook has changed dramatically:

Since mid-2008, money supply has exploded beyond $1.65 trillion, with more rapid growth on the way.

Is Deflation Dead?

No. It will return.

But at this juncture, inflation is the primary concern, with far-reaching consequences on how you invest, when and where.

In the days ahead, my team and I will give you step-by-step instructions on how to protect yourself — and profit.

But first, I want to clear up a few basic points. Although we may sometimes disagree on the specific timing and magnitude of particular market moves, we are unanimous in our views about a few fundamental issues:

First, until and unless there is a dramatic change in these inflationary forces, it should be clear that the U.S. dollar’s decline will accelerate in the months ahead.

Second, despite its decline, the U.S. dollar will continue to be a viable, widely traded currency. It will not, as some seem to fear, simply disappear from the face of the earth.

Third, it is both impractical and unreasonable to abandon U.S. Treasury bills and other conservative dollar-denominated investments. They continue to provide U.S. citizens and residents the best safety and liquidity in the world today.

Fourth, the best way to protect yourself from a falling dollar is with contra-dollar investments such as precious metals, natural resources and assets tied to strong foreign currencies.

Stand by for more details in upcoming emails from key members of our team, including myself, Larry Edelson and Mike Larson.

Good luck and God bless!

Martin

Easy-Money Fed Fueling Dollar “Carry Trades”

The yen carry trade is over but looks we are probably going to see a new currency for the carry trade. The US Dollar. My suspision has been confirmed after reading this article.

Buy physical commodities, sell dollars, and buy foreign currencies. Im personally waiting for a pull back to go long the Euro. -TNB

by Mike Larson 09-18-09

A fascinating thing just occurred in the global interest rate market: For the first time since 1993, it became cheaper to borrow dollars than Japanese yen! The three-month dollar-based London Interbank Offered Rate, or LIBOR, slumped to 0.292 percent, compared with the yen-based LIBOR rate of 0.352 percent.

I know. You’re thinking: “Who the heck cares?” But this development is big — and so are the potential implications. It’s all because of something called the “carry trade,” which I’m going to get into right now …

The Carry Trade Explained …

Let’s say you’re an international investor looking to boost your returns. One way to do that is to use leverage, or borrowed money. The cheaper you can borrow that money, and the greater the yield you can earn by investing it, the larger your returns. Every single basis point, or 1/100th of a percentage point, less you spend in borrowing costs falls right to your bottom line.

Carry trade is when global investors borrow in low-yielding currencies and lend in higher-yielding currencies.

The carry trade is just a global version of this game. Investors seek out the lowest possible short-term funding costs by finding the economy whose central bank is being the most generous. Then they take that money, sell the country’s currency, and invest the funds in currency and asset markets that yield more.

That’s essentially what the world did for ages in Japan. Japan’s twin busts in stocks and real estate caused the country’s central bank to slash interest rates to near zero in the early 1990s. Japan also flooded its economy with trillions of yen in excess cash.

But the money wasn’t used by companies and consumers to spend and invest at home … they were burdened by excess capacity and gun-shy about borrowing after getting burned in stocks and real estate. Instead, the money was used by global investors to fund investments elsewhere.

There was enormous profit to be had in this game because the rest of the global economy did fairly well during Japan’s “Lost Decade.” You could borrow yen at, say, 0.5 percent and invest in places like the U.S. at around 5 percent. It was a veritable gravy train of profits, derailed occasionally by events like the Long-Term Capital Management blow up in 1998.

What the Carry Trade Did to the Yen and Global Markets …
And What We May See Happen Here

The mechanics of the carry trade require that you sell the carry currency and buy foreign currencies against it. So one of the side effects is that it depresses the value of the borrowed currency.

Another side effect is that the carry trade helps inflate global asset bubbles.

Last time around, it did this by transporting the excess liquidity being created in Japan to foreign shores.

Now, thanks to the Federal Reserve’s incredibly easy policy stance, we may be in for “Carry Trade Round Two.” Only this time it’s not Japan’s currency that’s being sold relentlessly to fund risky bets …

It’s our dollar!

Look at the chart to the left of the U.S. Dollar Index (DXY), which measures the performance of the greenback against six major world currencies (the euro, yen, British pound, Canadian dollar, Swedish krona, and Swiss franc). It looks like a ski slope, pointing down and to the right.

Unfortunately for dollar-based consumers (that’s us!), the falling dollar has side effects. It drives up the cost of imports, raising our cost of living. It also boosts the price of commodities like gold and oil. And it means the cost of travelling abroad goes up, too.

However, you can actually PROFIT from the trend by socking money away in contra-dollar plays. That includes natural resource stocks, gold, and foreign short-term bonds and stocks. If you want to know more, I urge you to check out my colleague Larry Edelson’s blog. He’s got some great information for you there.

Until next time,

Mike