Thursday, February 26, 2009

The Conundrum

By Joshua E. Stone

Imagine it is the year 2016, Obama is finishing his second term, and the economy has recovered….just two little problems remain: inflation and debt. This is the optimistic scenario. Being ever the optimist, I can do this. But it has to mentioned here, that to put just the unfunded National debt into perspective, it would be as if you had spent one million dollars a day for the last 2000 years and you would still need 700 more years to spend one million a day to pay it all off. Or another way to put it would be as if you had annual income of just 26k and a debt of 120 million dollars.
So now what? I wonder how good the recovery will really be, and who it will really recover for. One thing is for certain: you will certainly need to be making a lot of money in order to afford the prices for everything from gas and food to recreation. You also better not be in debt, or making your money from some sort of loan origination.
Without going into a huge history lesson, it is a fact that money returned on debt has been negative since sometime in the 1960`s. In other words, you can not possibly get a positive return on your debt, and have not been able to for decades. If by chance you think you have done this, it was more like an illusion than reality. If you look hard enough you can find that you have really lost money over the long run by operating in debt. To me this explains perfectly why major companies in debt like the auto industry are having such a hard time surviving, while smaller companies who have not taken on debt seem to be doing well for the most part. (I speak from experience here being the owner of a small wheat farm).
As far as going into debt for a home or real estate, all the level heads have always said to limit this only to your primary residence and not to take on loans for a house that will take you 30 years to pay off. Is it any wonder then why we have had such a crash in real estate, despite the fact the politicians did everything in their reach to enhance that crash, to help them gain power in the years and even decades preceding the 2008 election.
By the time 2008 came along too few knew to little and too many voted out of frustration and ignorance; much to the delight of the premeditating politicians who gained so much power in that year.
Assuming the politicians do manage to tame the budget and deficit, it begs the question: why the massive inflation? This is quite a conundrum we will find ourselves in.
There is a chorus of contributing factors of course, but at the end of the day it all comes back to the energy policy of the corrupt politicians in the USA. With the Recovery and Reinvestment Act you can find out very quickly what the priorities of the politicians are: Tax Rebates is number one, and the last on the list is Energy. They have it backwards. You can see this for yourself at
So imagine again we are in the year 2016 with still no feasible energy policy for the USA. Just think back to eight years earlier in the summer of 2008 when all was well except for that pesky gas price at the pump. Will the successor to the current Administration have the wisdom to do something like President Bush did in lifting the ban on offshore drilling to help pop the oil bubble? I for one as a small wheat farmer that grosses less than 20k a year was saved by that action.
Exposure to gold and silver in your investments and trading are the best way to deal with this manufactured crises. Look for a bottom in consumer confidence and the existing home inventory to fall lower over the next ten months to start looking for a bottom in stocks. But the stock recovery will be a long haul to put it mildly. Gold is falling at the time of this writing, at about 941 currently bouncing off the support in the 936 area. I am looking for a fall to the 901 area maybe 898 if we are all lucky, to buy some more gold. Silver is undervalued to its production costs, so that’s a no-brainer at anytime as long as you have the margin to survive the swings in price. I think silver is a good buy in the 12 dollar handle and for those with less margin/smaller accounts 10.50-12 dollars should be a fine range to buy it in 2009. Silver costs about 20 dollars an ounce to produce and gold about 300 dollars and ounce. And that was a few years ago.

Friday, February 6, 2009

Bubble Transfer

By Joshua E. Stone
After the way the market has behaved over the last 2 months I am thinking the top is in for the dollar. I am hearing many traders expect gbp/usd to fall next week on bad data after a mind numbing run up from the 1.35 handle. This should present a good chance to start getting the market set up for an eventual run on everything not the dollar, like gold, silver ect.
The porkulus saga in Washington will also drive markets down as fear mounts over whether they get something passed, again this should help drive the markets into a good position to start setting up the big bubble transfer from treasuries to commodities once this behemoth is eventually passed.
How long this process will take is harder to guess at, but the charts are talking. We have weekly support on the eur/usd, gold and silver. It’s just a matter of time before the oil starts to head up on anticipation of spring demand.
So I am waiting for the drop coming in the S&P and gold, and then I will be looking to go long stocks gold, silver, eur/usd ect.
A close below the 800 level in S&P and/or Gold on the weekly chart negates this speculation.

Monday, February 2, 2009

Economic Outlook for 2009 and Commentary

By Joshua E. Stone

Monetary Policy: Expect the Fed to keep the Federal Funds Rate at current levels near 0-.25% for the remainder of this year at least. The Fed will worry about inflation later. The main focus for them right now is to stimulate the economy and get credit flowing again.
That said the Fed is setting up a nightmare scenario for supply and demand. The thing to understand is that business inventories are getting lower. When demand kicks up again as the Fed plan, it will put pressure on supply. This combination of forces leads to inflation.
So it is clear that at some point, barring a massive depression that the Fed will have no choice but to raise interest rates again, and quite aggressively.
Ultimately inflation may go higher than 10%.

Housing: Expect the housing prices to start to bottom in the next year maybe even longer. The recession is already one of the longest in history, and I expect it to last longer than any in the past.

Employment: Expect unemployment to reach double digits before this recession is over. I am guessing it may go as high as 10% this year. I don’t see much of an employment recovery really. This will be a jobless recovery. Unless the new Administration in Washington can get the corrupt politicians to make a new energy policy that creates jobs. Yes We Can!

The Dollar: The North American Union will become a reality soon enough, sadly. I am not sure what this spells for the Greenback. I don’t see it becoming history all together, but certainly revalued.
The oil will go to 600 a barrel if they don’t do something soon about energy policy. Expect oil to go to 75 a barrel this year, then 150 in the next few years if not sooner.
Gold has decoupled from the currencies and will most likely keep going up and not look back much at all. If S&P 500 goes down 50% from these levels then gold would go even lower maybe. Into the 400 handle perhaps is my speculation. But only a speculation on my part, many think it’s on a one way road up.
The S&P 500 has a 50% downside risk from these levels and is the key to the recovery, besides a good energy policy. If S&P moves up from here for the rest of the year, then expect a quick recovery in 2010 and oil, gold,stocks and the others will start flying high. (i.e. inflation)

Will It Work? Will the stimulus and bailout efforts of the Fed work? According to folks much smarter than me it will. There will be so much money coming into the system by just the first half of 2009 it will have an amazing effect on the economy. The problem is that these efforts are the equivalent of giving a drug addict a dose of his narcotic he is coming down from.
History tells us that the efforts of the New Deal actually did more harm than good, till WWII; when the real big spending kicked in full force.
This makes me think that the current efforts ultimately will not fix all the problems, but a new currency and global tax system or war would. The bill is just too large and someone is going to have to pay it somehow. But this is more long term and I will not go into it here. For the near term just the efforts of the Fed with TARP, the expected tax rebate on the way and the hope surrounding Obama will provide a remarkably quick recovery albeit a hollow one to say the least.

The Real Story

By Thomas Sowell
With both Barack Obama's supporters and the media looking forward to the new administration's policies being similar to President Franklin D. Roosevelt's policies during the 1930s depression, it may be useful to look at just what those policies were and-- more important-- what their consequences were.
The prevailing view in many quarters is that the stock market crash of 1929 was a failure of the free market that led to massive unemployment in the 1930s-- and that it was intervention of Roosevelt's New Deal policies that rescued the economy.
It is such a good story that it seems a pity to spoil it with facts. Yet there is something to be said for not repeating the catastrophes of the past.
Let's start at square one, with the stock market crash in October 1929. Was this what led to massive unemployment?
Official government statistics suggest otherwise. So do new statistics on unemployment by two current scholars, Richard Vedder and Lowell Gallaway, in their book "Out of Work."
The Vedder and Gallaway statistics allow us to follow unemployment month by month. They put the unemployment rate at 5 percent in November 1929, a month after the stock market crash. It hit 9 percent in December-- but then began a generally downward trend, subsiding to 6.3 percent in June 1930.
That was when the Smoot-Hawley tariffs were passed, against the advice of economists across the country, who warned of dire consequences.
Five months after the Smoot-Hawley tariffs, the unemployment rate hit double digits for the first time in the 1930s.
This was more than a year after the stock market crash. Moreover, the unemployment rate rose to even higher levels under both Presidents Herbert Hoover and Franklin D. Roosevelt, both of whom intervened in the economy on an unprecedented scale.
Before the Great Depression, it was not considered to be the business of the federal government to try to get the economy out of a depression. But the Smoot-Hawley tariff-- designed to save American jobs by restricting imports-- was one of Hoover's interventions, followed by even bigger interventions by FDR.
The rise in unemployment after the stock market crash of 1929 was a blip on the screen compared to the soaring unemployment rates reached later, after a series of government interventions.
For nearly three consecutive years, beginning in February 1932, the unemployment rate never fell below 20 percent for any month before January 1935, when it fell to 19.3 percent, according to the Vedder and Gallaway statistics.
In other words, the evidence suggests that it was not the "problem" of the financial crisis in 1929 that caused massive unemployment but politicians' attempted "solutions." Is that the history that we seem to be ready to repeat?
The stock market crash, which has been blamed for the widespread suffering during the Great Depression of the 1930s, created no unemployment rate that was even half of what was created in the wake of the government interventions of Hoover and FDR.
Politically, however, Franklin D. Roosevelt could not have been more successful. After all, he was the only President of the United States elected four times in a row. He was a master of political rhetoric.
If Barack Obama wants political success, following in the footsteps of FDR looks like the way to go. But people who are concerned about the economy need to take a closer look at history. We deserve something better than repeating the 1930s disasters.
There is yet another factor that provides a parallel to what happened during the Great Depression. No matter how much worse things got after government intervention under Roosevelt's New Deal policies, the party line was that he had to "do something" to get us out of the disaster created by the failure of the unregulated market and Hoover's "do nothing" policies.
Today, increasing numbers of scholars recognize that FDR's own policies were a further extension of interventions begun under Hoover. Moreover, the temporary rise in unemployment after the stock market crash was nowhere near the massive and long-lasting unemployment after government interventions.
Barack Obama already has his Herbert Hoover to blame for any and all disasters that his policies create: George W. Bush.
Copyright 2008, Creators Syndicate Inc.


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