Economic Forecast and Commentary for 2012

By Joshua E. Stone

As the election year frenzy whips up, the Federal Reserve is target numero uno for the emotional base on both sides of the political spectrum as cannon fodder to gain votes, with the global economy at stake. Adding yet one more headwind for a fragile recovery and a bug in the margarita of the mostly under rated and brilliant Central Bank Governor Ben S. Bernanke.

Monetary Policy

            The forecast for interest rates on this blog have been exactly right so far. It is now become patently clear how long the Gov will keep them low, since he now sets up a time frame for his policy instead of just language that everyone can debate to utter oblivion and confusion.           

            If one wants to have more than a drive-by understanding of how Ben Bernanke has used his arsenal of tools up to this point to re-write the text books, one need look not much further than his speech to the National Economists Club in Nov. 2002. A speech many would seem correct in saying is likely the reason he was appointed by a horse smart President from Texas.

            While an alphabet soup channel understanding of the maneuvers of the Federal Reserve Bank both past and in the future are far more sensational and conducive to ratings and the Cassandras` of the world; this perspective is not only physically unhealthy since it causes so much stress, it is fairly ill informed and not a very accurate take on Central Bank Policy from my position in the drive-by theatre. 

            This sort of polarization has only served to elect leaders who are willing to use emotion and omission to gain constituent favor. With the end result being bubble burst after bubble burst for decades and a declining standard of living for Americans as collateral damage.

On the bright side: globally more people have risen out of poverty in recent history than ever before.  If one happens not to believe this fact, one must use some basic reasoning and math skills and draw a simply obvious conclusion. An inability to be able to make this kind of judgment is concerning and dangerous. It not only shows a lack of critical thinking, it demonstrates in a nutshell how the dumbing down of America has been a resounding triumph for propaganda monopoly.

Now let’s look inside the mind of Gov. Ben by simply examining some parts of this speech in the autumn of 2002 that he made. A speech that outlined every step he has taken up to this point and clearly explains what he will do next.

            In this speech Bernanke said the following when describing one of the tools he would use in the various steps he would take to fight deflation that reveals with a fair degree of certainty exactly what his most recent operation has been, and at what stage we are at in his series of steps he described in this speech:

            “… For the Fed to commit to holding the overnight rate at zero for some specified period…”

            This is a very easy reference point, a sign post that one can easily recognize as one of the Gov.’s most recent actions that almost everyone knows about if they follow interest rates to some degree. These days the number of folks doing this is quite a few, since many are watching the housing market as either first time buyers looking to buy that first home, or those who are trying to refinance, and as an indicator of the economy and confidence.

            If the US economy is the Professor’s laboratory, the mad scientist must be feeling some degree of satisfaction at this point. In his speech, the Gov. explains his theory on the application of agency tools and their effects on deflation and the steps he would ideally follow to combat it. While quite difficult to grasp in my opinion, one of the things I pull away from it is the idea that his theory if executed properly will always stop deflation, but more importantly that not everyone agrees with this concept despite historic precedent that seems to support the Gov.’s hypothesis. The current empirical results of real world applications and executions of the methods modeled in his speech by him and his predecessors show the evidence is in his favor at this time.        

            If one doubts this reality, they just need to put things in perspective, use some simple reasoning and math skills, and the facts will become clear to an open mind.

 I am not going to take any time out in this forecast to defend the emotionally unstable notion that the US economy is in a depression, a double dip, or that it is ,”..Just about to go over the cliff any day now...”.

             I am certainly tired of hearing the partisan spin from both sides that everything has been done wrong and only made everything worse.  However true that may be, the fact is we are not contracting as much as one would expect by now. The fact is there is growth in the economy, and it is enough to keep us with our head above the water as the economic data flow proves.

            But, if your one who thinks everything about the data is not real, then it is not possible to believe the data. But then that only leaves you with pretty much one thing left to believe in which granted is very lucrative; but also dubiously healthy, which is fear.

So since we know that the Gov. is going to keep rates fixed for a predetermined amount of time, we can then look to his next comments for a clue as to his next actions, or even actions he has taken but may not be widely or easily known by most:

“…For the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt… “

He has done this in what is widely known as Operation Twist , whereby the FED has been buying the US debt. As one can imagine, this operation has been the subject of a great deal of propaganda for the masters of spin and the architects of the convenient truths who use emotion and omission to keep the politics distracted and in the gutter, appealing to the worst in everyone.

The fact yields are falling and not rising appears to me to be the crown jewel of evidence supporting the Professor `s deflation theories. A fact that would have the Doc getting giddy with excitement as the laboratory results continue to stack up in support of his thesis. Indeed, if the world was a fair place in my opinion, the Gov. would be awarded a Nobel Peace Prize for his contributions in economics not to mention policy. But as I will explain shortly, it has become very clear to me after reading this speech, why feelings about him are so polarized.

But lets first take a look at a couple of other steps the Gov. would take after purchasing shorter term Treasury debt:

“Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years.”

This is just an extension of Operation Twist spun as many disappointed propagandist and gold bugs claiming the Gov. is out of options as “Shout”. The Gov. is far from out of options at this point, and here are some of the reasons why as the Gov. goes on to explain:

            “…the Fed has the authority to buy foreign government debt, as well as domestic government debt… the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt”

            This is the bazooka with a silencer in the FED`s arsenal, and if everyone catches on to and becomes aware of it, will cause the rabid base to cry foul and every possible conspiracy under the sun. Even more entertaining to those in the “know” like traders is the fact this is already being done.

            So what does this mean exactly? I am no expert and my analysis is certainly not the final insight, but it would appear to me that the FED has the ability to purchase several times the amount of US debt in foreign securities! This is truly a mind numbing idea in my opinion. Let’s just say for example that the US debt is only 4 trillion, this means the FED could be the purchaser of nearly 30 trillion in foreign debt! No wonder the ECB is so resistant to being the lender of last resort; there already is a global lender of last resort: the FED.

             I wonder about this and its implications. Does this mean the FED basically has an unlimited balance sheet? Not needing approval by anyone? Not even the President? Furthermore, that it is not even transparent so as not even known by anyone outside the FED? I would not even be surprised if there are built in charters amongst the various Central Banks that protect the supremacy of the FED. After all they invented this fiat system. It is also a fact that the ECB charter is very limited, I can`t help but think this is a hangover from WWII and how fearful the world has been ever since of global currency denomination domination by the German Central banks. This is not conjecture, it’s a fact all wars have been fought over the dollar and its standing vs. other banks in the world; from WWI and Iraq, to Libya. 

            So given the fact that QE3 is actually already underway in the form of stealth operations by the FED and world Central Banks, and is going to continue for quite some time it is only a wonder why many folks can`t believe the Gov. when he says the following since he is in fact already doing this by purchasing securities foreign and domestic:

“…intervening to affect the exchange value of the dollar is nowhere on the horizon today”

“A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation.”

            The Gov. is devaluing the dollar, and I think he plans to continue this as long as the economy stays in deflation.  According to the quotes above, the historic precedent for devaluation was 40%. I think that the Gov. is trying to say that it will likely be the case this time as well.

            Next in the speech by the Gov. he explains what could only be described as QE4 and flies in the face of the global liberal agenda to hike tax rates across borders and shows how those waiting on QE4 might be waiting for a long time indeed. But it is beyond the horizon at some point as the global political gears continue to mesh and churn. It also explains why he is so polarizing:

 “…of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets…”

            “…policy options I have discussed so far involves the Fed's acting on its` own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices…”

            The best way to describe all this is “stealth socialism” in my opinion.  But to be perfectly honest, it’s a bit over my head at this point. I think as time goes by these statements will become easier to understand. It is safe to figure that at this point these policy maneuvers are not being exercised.  If I understand this part of the speech correctly these policies would be recognized as a tax cut by the fiscal authorities, and an increase in government spending. Neither of which has happened yet depending on whom you ask. I happen to be living in the very real world of Government cut backs and see and hear of the effects on a daily basis. A trend I expect to see for a long time to come. Not only would we need to see a very publicized increase in public spending, but this increase in demand on goods and services by the Government would also be accompanied by an equal amount of FED purchases in the private sector. But it has to be pointed out, that all of these measures were in effect taken during the Great Recession in the form of extending the Bush Tax cuts, TARP and the American Recovery Act.

GDP

            If China is to overtake the US economy, they will have some Ghost Cities to show for it. While everybody in 2011 was looking one way across the Atlantic to the Euro crisis, from behind in the other direction across the Pacific was another big story of this coming decade: the China charade. Americans know very little about this great country except that they respect and fear it in many cases. According to my own writings of the last few years by the year 2012 the economic recovery would be derailed by bad debt, energy and foreign policy. This has begun to pan out as the Arab Spring solidifies into a deep freeze against America and Israel. My take is that if the Super Majority that came in on the tide with the election of 2008 had not been paralyzed by the health care heist, we would be on our way to a very certain and prosperous future. However the US economy continues to resists another downturn according to data releases in 2011. As a result I expect to see US GDP come in between 1-2% again this year. Last years forecast was the same and it is turning out that 2011 GDP is expected to come in right at the middle of the road at 1.5% 

Dollar

            The reports out of the Middle East about possible dangers to global oil supply are ongoing, developing, and gestating into a plethora of ingredients for the perfect storm. As a result Oil will be supported at 90 a barrel this year. We are very close to seeing a surge past 120 if policy continues to be so flippant. Gold is in correction until the market finishes realizing that the fight against deflation is here for a while, and the Eurozone crisis is dealt with. I think gold is well supported around the current levels and won’t be surprised to see it be very volatile with a swing lower to 1150-1350 but still make another run to 2000k this year. I personally am not as confident of the long gold trade this winter as I have been for the last few, but am pretty sure it will be a good buy again before next winter. The stock market is technically poised for gains this year, with valuation placing it around 1350. It will remain volatile and capped as long as the Eurozone crisis is not satisfactorily resolved.

Politics

            The GOP nomination process will continue to be a thorn in the incumbents` side, having the potential to derail the longer term strategy the left has to keep the current President in power. That strategy is one of apparently having a rhino nominated in the GOP Primary, continued economic improvement, and perhaps an ace in the hole is another war, then pulling yet another one of the plays from the Bush playbook: “… stay the course…”.  On the other side for the GOP, the improving economy is diminishing their chances at unseating the incumbent. It is also becoming clearer that the assumed GOP nominee will not be able to win the General Election because of a host of reasons not the least of which is simple stereo types that the majority of voters will never let go of. The opinions on this good man on the street are unfair to say the least, and are bigoted at best. The curve ball is still yet to come, if Rick Santorum gets folks attention we may avoid the fiasco of a third party candidate and give this nomination something less than a rabble rousing contest and an actual throwing down of the proverbial conservative gauntlet at the liberals.

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We’re Not In Kansas Anymore

We Will Never Forget

          The empirical evidence that the people of the Occidental economies have failed to grasp the realities of globalization mount as the European and American political, economic and financial systems begin to disintegrate  and unravel under debt, civil unrest, contracting economies at worst, slowing economies at best, downgraded credit ratings and  a broken and second rate education system. All a result of  the fact the people have failed to comprehend what it really means now that the Third World has arrived  as a beacon of our success, the result of the ideals that we brought to the world via the “American Century” that are now manifesting as globalization.

By Joshua E. Stone

The Titanic is sinking because of a host of iceberg sized realities like the recent downgrade by Standard and Poors of the US credit rating from AAA to AA+ for the first time in US history. Realities like the fact China will be the largest economy in the world in a few years as a result of the exportation of the American economy overseas to more business friendly environments; environments that have modeled themselves on the American system of Capitalism as a result of the American Century with the added caveat of not being bound by the ideals of human rights, self determination and the bravery and freedom of individual responsibility that is the integral essence of American Exceptionalism. Ideals, concepts and values that even the hero of the “ it’s America’s Fault” crowd, the worlds’ longest reigning communist leader and as such the most influential ruler on the planet for the majority of peoples by proxy, Fidel Castro, has said is the best and only feasible economic modality for the world to follow . He has demonstrated his belief in this ideal by passing the torch of his leadership to his brother who has begun the process of privatizing the Cuban economy.

Meanwhile back at the ranch the dumbed down media and people of the west are unable to realize that the history books will record this as a watershed event for socialism and communism after the falling of the Berlin Wall. The people of the US are unwilling to understand that these are the reasons and forces behind these fundamental transformations that have happened to our country as the result of not only the facts just mentioned but also that unlike before and after WWII there was no place for corporations to go to in the Western economies. But now there is, because of Americas resounding success of raising more people out of poverty than has ever been witnessed in history before via its capitalistic transmission to the entire world.

It is these realities among many that are unraveling the fabric of our economy and even our society and not just some rich white corporate boogie man who stole everything and whose only goal is to suppress minorities and keep them enslaved as a majority of people choose to believe. It’s not even because of convenient and mainstream targets like currency manipulation. Even with the popping gold price sending out its May Day warning as it has always done throughout history before a major calamity or transformation transpires in the brightest fashion possible at nearly 2k an ounce, Americans scratch their heads unable to understand why this is happening to gold and tell Congress to tax a few wealthy folks left in America. A diminishing base of wealth that is already migrating to Asia where wealth is welcomed and not punished, and goes much further because of the unlevel playing field as a result of the fact that in Asia they are not bound by Exceptionalism but only profit.

The denial of the people is exemplified by the electing of politicians bought and paid for by lobbies. Their denial is also demonstrated by the way they have chosen to label a vocal,  no nonsense this-is-the-facts-of-the-matter conservative minority as racist, greedy bigots for refusing to deny the grave reality of the impending currency collapse; a minority that unlike the majority of the population and politicians, have stayed focused on addressing the imminent financial implosion of the Empire with solutions, however painful and flawed they may be as a result of voters who vote based on feelings ruled by fear fostered by the drive-by media spin of class warfare and blame.

The voters and people are apparently unwilling to learn facts. Facts which, said in another way, are that Corporations are very certain of many things: certain it will cost too much to even hire someone, certain it will cost too much to pay for their employees healthcare, certain they can avoid taxes if they hire and produce somewhere else, certain that the US is an unfriendly business environment as a result of massive government regulatory and financial interference and intervention that result in deflated earnings from currency debasement and impossibly lengthy permit requirements’ and approvals with insane fees that make it simply not worth the effort. Corporations are certain that America can do anything it sets its’ mind to, like killing Bin Laden, but for now it has set its’ mind on entitling itself into default and bankruptcy, in short… financial collapse.

All of this in an age when our beacon of strength as a Nation has not been rebuilt at Ground Zero ten years after the apparent dawn of our twilight on September 11^th 2001. To add insult to injury our Nation faces depression era unemployment with the most unfortunate of society surfacing as 1/3^rd of young African American men. This has happened in the Space Age when we have the ability to build a tower at Ground Zero with magnetic elevators that could reach that hotel that will be in orbit very soon. But instead we are repeating the same tragedy of the 1960`s as was made with the Apollo Space Program and are focusing all of our blood and treasure on a one time jaunt to some silly asteroid and the planet named after war, Mars. This is ironic at best, tragic to be certain.

Rather than wake up and reclaim their self determination and personal responsibility the American and western people cling to talking points of blame and class warfare, while they fail to vote for a majority of politicians who are not pawns of the class warfare special interest lobby that promises to save the people. The lobby that sponsors the phone-hacking drive-by-media-corporate-military-industrial–complex- monopoly that the people are conditioned by whether they pay attention to it all or not or whether they know it or not because that’s the intention and result of the monopoly.

These facts and realities are virtually assuring (to the delight of many and even apparent majority who believe the West and especially Israel and America stole everything in the first place and need to be “fundamentally transformed”, by apparently equalizing the West with the Third World  and subjugating it back to the elite that lost their rule over it in the American Revolution and would have Israel cease to exist at all) that in the very near future the rise of Asia, the Middle East and South America as the power houses in the Century of the Orient will be who the Occident will have to answer and look to for everything from leadership, loans and jobs, to resources, education and  weapons.

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Special thanks to Pamala Maitreya for editing and contributing.

Economic Outlook for 2011 and Commentary

Middle East revolutions are yet another straw on the camels back among a storm of headwinds buffeting the outlook for the US economy in 2011 and beyond.

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” This is a repeat of my last two year’s forecast verbatim. There is some possibility that rates could be raised before the end of the year this time. There is a very high probability that the language will change enough to set the stage for rate hikes next year.

            The FED has a dual mandate: to keep unemployment and inflation low. Right now it’s failing on both of these mandates in many peoples opinion. While perhaps inflation is debatable, I am in the camp that sees higher consumer prices as deflationary. But it appears that we can’t argue against disinflation either, as this is clearly being felt by anyone who buys things.  However there is no debate about the worst employment picture we have had in the US in many decades. Worse, thanks to the fact that apparently no one in Washington is reading this blog; there is still no job creating energy policy. A Manhattan or Man to the Moon equivalent energy policy that switches all Government vehicles to Natural Gas, and road and infrastructure projects that launches us past China and last but not least…a new cheap source of alternative energy that does not transfer the wealth of the current energy cabals via some government mandate or new taxes or the termination of subsidies that will ensure the proposals are DOA. While the “experts” say we can never do these things, we are not China and can’t compete with them; I say we are America and can do anything. I would also suggest that those who think we can’t do anything need to move to somewhere that low expectations are the norm.

That we have not dealt and even worse not even addressed the issues is setting us up for real troubles in the next year or so if not sooner.

                Inflation hawks will use everything at their disposal to confuse the markets about future policy changes, like the fact we might get some dissenting votes at the next FOMC meeting in March and the following ones this year. I would point to the UK, where something similar is happening. But if you dig deeper, you will find that the UK is in no position to raise rates and thus this recent rally in the pound has been nothing more than a breather before more downside ensues by many peoples estimation.

                Delving a bit deeper into the Bernanke Dilemma there is a big problem I have only heard addressed by some people, mostly callers on the talk radio shows saying they can’t get a loan because the lenders are getting stricter and stricter in their terms. This is contrary to the mainstream understanding that QE2 was designed to help keep lending available to everyone and loosen the purse strings. Why is this happening?

                As brilliant as Bernanke is, and as smart as his policy has been in my opinion to defy consensus in an effort not to repeat history, he seemingly did not count on or foresee one critical thing: the ability of the fat cats to put money where the interest is. I wonder about this conundrum though, and whether a man as intelligent as Bernanke really could have over looked something this problematic. To the best of my knowledge the deal Bernanke has made with the banks works something like this: the banks can borrow money for free, they can then sit on that money and earn interest on it risk free. What a deal!                

So that leaves the banks two clear choices to choose from: If they loan it out, they have to take a risk. If they keep it they earn interest albeit small, but the bottom line is all that matters to these folks. Not to mention because of the new regulations they have to stay well funded to protect all those toxic assets they still carry.  After all the bursting bubbles in recent decades, can anyone blame them if they don’t want to take on anymore risk? How can we expect any bank to risk funds on a business that may or may not succeed, when it is more likely than ever before to fail than succeed do to the uncertain nature of policy going forward? After all, it is their job to keep money safe. Why are they suddenly sticking to the letter after all this time one can only wonder. Perhaps the new regulations have worked too well.  One can only wonder what they are hatching up for the next bubble though. Or perhaps this is the new crisis, the new “bubble” or even worse the next scam and fraud pulled on the people…

It appears to me, the only way out of this dilemma besides a three or four point improvement in unemployment would be an executive order to force banks to lend and corporations to start investing. This has its problems however: who is going to decide who wins and loses? Not to mention it was the politicians telling banks to loan to certain demographics that was largely responsible for the sub-prime meltdown of 2008. The only other option is for Ben to raise rates. Something he needs positive economic growth that runs the risk of inflation to do, which is not happening at the moment from his point of view

 It’s quite a quandary: banks and companies don’t want to lend or invest till there are jobs to prove the economy has recovered, and the economy can’t recover till the banks and corporations start lending and investing to create those jobs.

The coming days and weeks will bring about a major debate over the debt ceiling. This will likely trigger a good bout of dollar weakness and market jitters, but I don’t think the great bond crisis is at hand this year. There is still no viable blueprint for another reserve currency at this point. What is already happening is that other countries are ditching the dollar in many places and trading in their local currencies instead.  So in a way, our sovereign debt crisis is at hand, but only in stealth mode and not readily apparent. It’s not like a few trades made between Russia and China denominated in their respective currencies are a big deal, but the day Saudi Arabia or China announce they will no longer accept or require dollars for oil or trade will be noticed and felt by all. It will be equivalent to an act of war and will trigger a massive sell off in everything but commodities from what I understand. So it seems the gold bug scenario is at best a tapestry of doomsday for now. That said, recent developments in the Middle East do seem to make this scenario much more likely. China is also very unhappy with their exposure to US debt and has a number of tools at their disposal politically and economically before they have to use the “no dollars accepted here” nuke. At this point they are using the Broken Arrow method of beating us for lack of a better expression, and it is quite effective.

That said, all these forces moving away from the dollar are already in place and in motion as mentioned before, and as a result that is why we will continue to see inexplicable rises in gold and especially commodities.

In recent testimony Bernanke defended QE2 when asked about global commodity prices explaining that it is supply and demand issues, not FED policy causing the spikes in prices. As true as this may be in part, it is only one of many things one could call a perfect storm driving up demand and diminishing supply. The fact that QE2 has added fuel to the fire in this trend can’t be denied as the spikes in most commodities took steroids after QE2 was announced. Most folks don’t understand how QE2 works in my opinion and as a result most are quite confused about FED policy going forward. Bernanke can not only raise rates in fifteen minutes like he said on Sixty Minutes, he will stop the QE2 sooner rather than later if the employment picture improves.

If employment does not improve, and the US Treasury bond yields continue to go higher, it is hard to defend the FED and its policies regarding QE1 and QE2 and many think it will result in QE3. This will in turn result in a run on the dollar and force the implementation of a global gold standard by China and others. Something that is already in the works and is bound to happen sooner rather than later in my opinion. The question is how long the people in the US will let the politicians keep them snowed and asleep before they wake up, or will the global gold standard come first, plunging America and the UK into Third World (this is already occurring due to the natural course of events in the US, but is exacerbated by Government policy or lack thereof) status to wake them up.

Housing

               

                In the last two years forecast I predicted:  “…the housing prices to start to bottom in the next year maybe even longer…”… and it appears like it will be more on the latter side of that statement...”

It appears this was fairly accurate as the most recent data confirms the expected correction in housing values after the First Time Home Buyer tax credit expired resulting in a slowdown of home purchasing over the remaining months of 2010.

                The forecast for this year is pretty simple and straightforward: we are once again heading off a cliff in home values with no hope of any return at this point because there are no meaningful signs of a recovery in jobs or even worse no plans to create those jobs. While this continues, the “stealth” or shadow “supply” of unsold homes continues to build continuing to compound the problems.

                In the tradition of this blog, I would like to be more optimistic about this outlook. The only encouragement I can find is that I think some folks will be in their homes to stay this time, in the belief that home prices will not fall much further and that they are pretty much out of options as rents are rising along with everything else so eventually home values will follow. This is a pretty sound strategy in my opinion. But I am biased as I have recently helped my own mother buy a place with the help of Uncle Sam.  The interesting thing is; that as a result of the free money, we have a very high pain threshold for falling value in that home. It is also a home, not an investment property. This is one thing we won’t be dealing with this time: is the collapse of the speculative investment real estate bubble.

Employment

                In the last two years I said in this blog to “…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! ...” 

 We have reached a new norm, where the number of underemployed and people out of work for more than six months has not measurably or meaningfully diminished during the last year or so. This means many people are now unqualified to work or when they do finally get work, it will not be at as high a pay rate as before.  This makes weekly unemployment claims one of the key data releases to be watching in the coming months along with the usual like NFP, GDP, Consumer Confidence, Housing and other data related to inflation like PCI and CPI.

                With no hope in site of any real job growth from the private sector or by any political initiatives on the horizon, unemployment will not decrease much from the current level of 9.0% for the rest of the year. I have no idea how it will get much lower than this if some drastic changes are not made regarding the current direction of the country. I think it is more likely to move back up if the status quo continues in Washington. I think a depression has been prevented, but this economy can’t be propped up indefinitely. 

                While unemployment has steadied, and never got above 10% this year; there are some very troubling statistics showing up if you look beneath the headline numbers.  There are also bills being proposed by politicians that would drastically lower the unemployment rate and slash the entitlements, creating a permanent underclass. While this is pretty much cheap political theater, playing the politics of fear is not a help. In fact is tantamount to dereliction of duty. How can any politician in good faith waste time on frivolous bills that have no chance of being passed in a time of war and crisis like this! It only shows and demonstrates a caliber in Washington of what I can only imagine and hope to be inadvertently nefarious politician’s and there equally suspicious proposals to help this country in good faith. One can only assume at this point that this and many other monsters` proposed and in some case created; like in the case of GSE `s are not by accident. The Federal Reserve and the amount of power it has is another example how smoke filled rooms have decided the direction of this country with the country only along for the ride.               

                A source of optimism is the underground economy, greatly underestimated by economist at large in my opinion, it is very unquantifiable and perhaps the most vital and resilient part of the US economy. I have said before there is a job at every firm for Social Networking engineers, and I am glad to say that in the time I first mentioned that last year I have seen many companies are taking it seriously at last and hiring for such positions. Unfortunately as with many things, often one must start as a volunteer or just as a side hand and show results before a company or potential boss will take notice and decide to give you a salary. So that’s right, I am suggesting you find a company you love and start blogging and managing a social network for them. Of course, it goes without saying they should already have a social networking presence, or if they do then that means you are trying to show them it can be done better. So like everything, communication and openness in what you are trying to do for them is a prerequisite. If they have good management, they should have no objection with you giving them positive exposure to the internet. Of course, it also goes without saying that one could easily find a niche being a critic, but the prospects of obtaining a salary from such work would seem more difficult to me. But perhaps not if it is noticed by competition and that gets you a job. 

                The biggest obstacle to creating and keeping jobs in the USA is a good energy policy and regulation. The forex industry is a prime example of this. There have been so many new regulations put in place by the CFTC in recent years I have personally had to move money out of the USA in order to get the flexibility I desire from my broker. Many countries will not even consider taking my deposits or doing business with me simply because I am in the USA. This has restricted my access immensely to the market. This is all done under the guise of “protecting” me and making the markets “uniform”. I see it all as a terror attack on the heart of our financial freedom. I have literally lost sleep at night in terror wondering how long before the CFTC figures out a way to keep me out of the forex entirely.  Sadly I think that Japan will be a leading proponent of banning retail forex trading in the coming years. It’s not like there is not plenty of compelling evidence that something is amuck in the futures industry. The USA could be a financial powerhouse if it was not for the free market killing regulations that have a stranglehold on this country.

An example of how ongoing detrimental energy policy and new regulations could derail jobs and small business is my own organic farming business: highly dependant on local transport and being free of costs related to regulation; I figure four to five dollars a gallon for gasoline could very well put us under. I have not figured out the exact breaking point, but much above the current three twelve a gallon is already making it much harder to break a profit and is depleting what cash there is to spare. Already we are pulling back on spending as a result of the higher gasoline prices seen at the pump in recent weeks. Not to mention the cost of wheat, the higher fuel prices go, the higher wheat prices go. This a very real and present threat, many have talked about food shortages and thanks to the QE2 fueled perfect storm mentioned before this issue could derail stocks and the recovery at any time.  People globally have already been feeling this pinch; folks in the developed nations will soon be feeling it even more as well. 

GDP

                I am expecting the GDP to chug along at about 2% again this year. Some argue that what positive data we do see in GDP is purely a result of QE2. I don’t think this is true, since in my opinion there is an underground economy fueling an organic recovery. This is the only way to explain how the US is doing so well in the recovery up to this point in my opinion. I fully expect the GDP to continue in this same range for the next several years. This is a new norm and with the result of Benny and the Inkjets policies, everything has been drastically inflated. Resulting in an apparent economic data “recovery” but I would rather call it an economic data “rescue” because the economy has been rescued from intense contraction (that would have been painful but was sorely needed in my opinion).

               

Stocks

               

                The two year bull cycle in stocks I have observed and forecasted on this blog for two years now appears to be on an unusual third year extension. This is based on a number of factors, QE2 not being the least of them. As a result I expect to see another good year in the S&P500 of about 15-20%. I am expecting some volatility this summer, the age old adage of sell in May and go away will probably be very true this year.

Dollar

Last year I wrote: “…Of course you can’t forget the possibility of events affecting the market. Any number of things could change the outlook for the dollar/stocks and energy/commodities in a hurry not the least of which is terror; but China is also a big problem. We can’t depend on them to keep fueling the bulk of this recovery as market action in recent weeks is telling us….”

This has turned out to be quite accurate in the sense that the dirty laundry that is the China economic machine is finally starting to be aired. As a result they are slowing there economy down with rate hikes. This has had a pretty significant affect on the markets over the past year. Slowing down a QE2 fueled rally in stocks and keeping major currencies like the Euro in check. 

While my “Death of the Dollar” mantra has matured recently and I don’t think we are going to see that happen completely for the foreseeable future. I, like everyone am bombarded with spin, and I am slowly beginning to see straight as I learn more. I have come to the conclusion that the dollar is the prettiest pig in the ugly contest as one analyst put it during the darkest months after the global meltdown in summer 2008, and that’s not likely to ever change. If it does, it will only be temporary before the replacement is found to be more attractive at first, but not at all functional or an even worse basket case. This puts the Euro on a teetering ledge. I expect to see the EURUSD trade in a range this year between 1.19-1.50 on the outside. I don’t think it is destined to fall apart this year. In fact China has begun buying up EURUSD and Euro zone debt. So the EURUSD looks to be well supported for the foreseeable future. We will see how things look next year, but you know the mantra by now: if these politicians and bankers don’t figure out how to stop creating bubbles and start creating a system that actually works this year were probably all heading down the chute in short order.

This does not mean that gold is going to stop going up though. Quite the contrary, it only adds more fuel to the fire as it becomes an instrument of hedging against uncertainty even for the smallest of households to the largest of banks.

 Another factor leading to gold and the rise of silver in my estimation is the IPhone. There are over 500 million phone users in India alone, and soon the phone and pc will be replaced for the most part by the IPhone. Can anyone say upgrade? This will only put more pressure on already limited resources.

 I could rattle off the traditional litany of reasons to buy gold and silver I have cited on this blog many times before, but I thought the IPod argument was a refreshing perspective; especially since the Debbie Downers of the gold rally love to point to supply and demand as a cornerstone for their argument against rising gold prices.

I have come to the point where I am not going to guess about possible corrections or what levels any corrections might go to. What I have observed is the most recent correction was decent, but has left those looking for more with a dry mouth of disappointment. In 2009 I did post charts on Twitter when gold re-tested the 1070-90 dollars per ounce support indicating it was a good place to increase long positions. I also forecasted last year that gold would close at around $1200 an ounce. This was pretty accurate to put it fairly. I expect gold to close at a lofty $1500 and ounce this year, perhaps even make a run to $2000 or at least $1681. It’s rather hard to guess at exact levels at this point since it has never been this high before and the best tool besides common sense is projected fib ratios. Silver is also on track for $50 an ounce. I have never talked much about silver, choosing rather to speak about gold as a barometer. It goes with out saying that if gold is going up then so is silver, and that has been true. Some argue that the move in silver is actually what is behind the rally in gold and is a canary in the coal mine for the economy and even geopolitics. It appears these speculators are being rewarded with more evidence everyday as the price of silver goes parabolic.

Oil can’t really sustain a level above $100 a barrel as long as the economy is in recovery in the opinion of many experts. So I expect to see oil to continue bouncing around from the $80-150 a barrel for the year. The wide range is due to all the factors I have been pointing out on this blog for over two years now and more. Not the least of which is the Middle East Revolution. It could go far higher if the Middle East alignment against the USA and Israel we have seen manifesting as a result of the ongoing revolutions continues spreading to other countries allied with America and Israel like Saudi Arabia.  Like I said before, it’s hard not to get caught up in the death of the dollar mantra and freak out about oil prices. But in the mildest tone I can muster: if the politicians don’t do something about our energy and foreign policies soon the dooms dayers are probably right, we will see oil being traded in a currency other than the dollar for the most part and this will set off a chain reaction that will cause gas, oil and food prices in the USA to go through the roof. It goes without saying that most of the rest of the world will suffer even more as they already have been for many years.

This could all happen over night, so being a trader or investor in this time is something that requires paying close attention to the ongoing unraveling of Americas influence, credibility and power. A process that has been expedited under an idealistic Administration brought to power by a naive populace wooed by a media so immersed in affirmative action and getting an African American in power that a mainstream journalist like Tom Brokaw can be quoted on Charlie Rose as saying “We don’t really know who he is or what he stands for…” on the eve of the election. A populace that still fails to see the wisdom former president Bush led the US with; and still sees him as the worst president ever simply because everything unraveled on his watch. Never mind it was his ideal of bringing democracy to the Middle East that is largely responsible for the revolutions we now see taking place; just as it was Bush who popped the oil bubble in 2008 by lifting the ban on offshore drilling. It goes without saying that every president I know of has done something to help destroy this country, and of course Bush was no exception, but vilifying him and canonizing another is the road to repeating the mistakes of the past.

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Recovery 2010: Summer Update

By Joshua E. Stone

There are a few factors pointing to the possibility that stocks have at least seen their lows for the year, if not found a new bottom. As I mentioned in one of my latest charts posted on the S&P 500, I am expecting 1237 as the next target to be reached. Some of the reasons for this include a strong Euro, a robust German economy, and other macro factors like US economic growth and geopolitical forces such as tax policy and the balance of power. Yet other reasons to be optimistic are there as well, like rail loads to name one…and the Yield Curves.

One needs look no further than the Euro to see that some stability has returned to the market. I read an article that was able to indicate 100 pip moves in the Euro on a daily basis never has happened and are actually an indication of a problem in the system. I for one have never ceased to be amazed at how strong the Euro can be….but I have also come to be equally impressed with its ability to become very weak quite quickly. With all the problems facing the Eurozone in the next year or so it’s no wonder either.  In either case, as with anything you can always find something negative in everything. Another Euro factor is Germany, a behemoth of an economy that is on track for a strong recovery. This cannot be dismissed. Germany is the powerhouse of the Eurozone and if they are recovering then I don’t think the woes of a few small states will bring it down. For now the Euro is a viable currency, and it is not going away anytime soon. Notice how the EUR/USD did not even flinch on Friday the 16th in the wake of all the pessimism, a week when stocks were down more than 2% across the board. The support of China for the Euro can’t be underestimated either. 

Another currency that I often look at for determining the direction of the economy and which accurately foretold the entire 2008 meltdown and ensuing `09 recovery is the USD/JPY. Ashraif posted this chart and analysis that I find supports a new uptrend is in order for the currency some time in the not so distant future. This would seem to indicate there is going to be a continued appetite for risk. What most folks don’t get in my opinion is exactly how long and slow it will be; just as I have been saying all along on this blog.

Looking at the USA, we find corporations sitting on approximately two trillion in capital as they wait on evidence of a sustainable recovery and the election cycle to bring in more certainty and hopefully a friendlier disposition towards business, as 2/3rds of jobs are created by business, politicians will be pandering to the votes that are the loudest and demanding one thing: jobs! Already there are whispers of allowing the Bush tax cuts to remain in affect in some shape. This idea seems to be supported by the FED  who explains that it is too soon to pull life support from the economy yet, but at the same time we must stop spending so much.

The Yield Curve should also be looked at, long term interest rates are lower than short term rates, and this indicates longer term growth….not economic contraction.  I don’t have a degree, but smarter folks than me say this is the case. My horse sense from running a farm tells me that it is only logical that if inflation expectations are higher in the longer term than they are in the short term, then in the longer term the economy is expected to continue expanding. That said, inflation expectations are very low, and the money supply has probably peaked for now....so the biggest problem facing the economy is actually deflation. Though I don’t see it as a threat at this point, it is a longer term problem that will be exacerbated by continued inadvertent genocidal tendencies from our political leaders and the lobbies that have them under their more money than god spell.

There is also much more to support the idea that the recovery is not going to double dip, and I suppose many can find even more facts to support the idea of a double dip; I for one am an optimist and do not let the sad state of affairs overwhelm me. I have always found that it’s easier to report on the bad news than the good news, and this is certainly the case for the mainstream media who amps up every detail of bad news in an effort to divide the country for our routine elections; with unemployment the biggest and best lagging indicator of the recovery being the most potent tool in the partisan belt to divide the nation.


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A Tale of Two Economies

As America struggles with crises after crises, she looks to her people for her future

By Joshua E. Stone


As the S&P closes in and surpasses the 1220 target mapped out in Jan by me, and even earlier by others; the questions are becoming more and more glaring. Where is the volume in this rally? Where are the average investors? Does the rally mean the recovery will be strong? If so, then why is new employment still below 300k a month?
I have come to the conclusion there is a tale of two economies: one in which the traditional job market is gone forever, another where the job market is wide open and not enough talent to fill the demand.
I think the biggest challenge facing America going forward is its people. They are used to getting jobs the old fashioned way, where you go to the paper and find something you can live with, or you get a job at the local mill or car company because that’s all the town has ever known.
While there may not actually be a job posted at the local mill, there is a job there no doubt….its just the management and the seekers don’t see it. At a local mill there is one job I can think of right away that is most likely not being filled: social networking marketer. Another example of a job at a hospital or any big firm that is not being filled: waste reduction engineer. Radio and TV stations are already using social networking or WEB2.0 with great success. The forex industry is a near grandparent in this field already, with social forums and whole websites devoted to experts and consumers alike where you can chat and exchange ideas with like minded individuals.
Between social networking and reducing waste in this economy, we could see vast improvements’ in our productivity and profit thereby increasing the GDP. Things like this are already underway in the form of the Green Economy. These are just two examples I have thought of for the purposes of writing this article, but there are more. For example, it is well known that the high tech industry in the USA is flourishing, but is plagued by a lack of talent in the employment pool and flying vultures in the form of new taxes.
The result is jobs are outsourced, the employment is floundering, industry growth is stagnant and the long term outlook for the economy gets more uncertain to many. Since it appears the people of the USA have been collecting unemployment for the longest time in history, one can’t blame them for feeling like there is no hope for improving their situation.


In theory and in history, the spendicide the US government is committing on behalf of its people will work to get us out of recession in the short term. The problem is that the principles of good economics demand that we don’t run large deficits during the good times. This is something we have failed to do since the late nineties; this has put us in a very bad condition to deal with these tribulations. Aside from the fact the spending policy in Washington has to change dramatically, the private sector has to put the other foot forward and create sustainable jobs for the future, thereby increasing the size of the economy and the revenue base the government has. All that said, history seems to suggest government surpluses as well as taxes that are too low lead to recession.
If this does not happen the next financial tsunami known as the bond market collapse will surely be impossible to navigate and survive in a meaningful way. A strong US economy will help us weather the collapse of the bond market much better, I would think. It also needs to be said that the USA is not Greece or like any country anywhere else, and our bond market crises will not be like the ones we are seeing now in Europe. Will this be good or worse as a result, only time will tell. All that said, history seems to suggest government surpluses as well as taxes that are too low lead to recession. I also do know we can print our own money, so that certainly changes the traditional dynamics of any bond market crises we will have here in the USA.

It is also easy to blame the government for this jobs crisis, the current administration fails to get serious about a jobs creating energy policy. This will ultimately be all of our undoing as the prices for everything continues to soar for the average person. The average person is not going to make it through the transition to more energy efficient models as even the most optimistic plans don’t have everyone driving hybrids in the next few years. I know that high energy prices are deflationary, but cheap energy is a prerequisite for a strong economy. An idea that seems to be lost on everyone these days but the poor folks and business owners who are seeing 60% increases in the COD and fuel expenditures year over year as we transition into the new decade. A VAT tax will put many of the small businesses left in this country right out of business. The recent disaster in the Gulf of Mexico proves the argument and concern beyond a shadow of a doubt: industry and the US administrations have proven there incompetence regarding energy production and policy. Just the consequences of this most recent catastrophe alone may have wiped out nearly an entire gulf and may devastated many industries in one of the world’s formerly most prosperous and beautiful regions for decades to come. In my opinion the Gulf of Mexico has pretty much been quite devastated up to this point by dereliction in policy and industry, and this flow of oil into the sea will certainly not help at all…no matter how lucky we get with the exact details of the cleanup.

My take on the market and the economy at this point are not very optimistic, I do have some optimism. But it is fading as I see the real issues and problems in this country either not being fixed, or even being completely ignored or exacerbated by a seemingly inadvertently genocidal political and corporate establishment.
I do think the current bull market is still in place, as mentioned before on this blog, most bull markets have two year cycles, that puts the current cycle at the age of a toddler by next March and set to end its buoyant ways in the next several months. I don’t see the FED raising rates before then, so that leaves the markets with room to move up baring some development that changes the current trend: like the FED adjusting their language to allow for an increase in rates.


The events in Europe recently have also demonstrated the contagion effect is quite real and could very well if not already have capped the markets in this bull cycle. Some analyst say the market will begin to fall this summer and there is somewhat scary evidence to support that now with the way the markets fell and gold surged on the heels of the Greek crisis in recent days. On the other side the recent uptick in volume could be a sign the average investor is putting their toes back in the water, perhaps as a result of the regulatory bills being passed increasing confidence in the market. I see this market as quite strong still, and the trend we have seen since March of last year though threatened at this point has not quite been broken. The rally and fundamentals are still intact; bolstered by improving economic data and a burgeoning consumer wallet fattened from ripping up credit cards, selling jewelry and walking away from mortgages. I think some sideways action will be in store for summer, then fall will arrive and the market will have done the classic sneak range up by that time.


This leads me to think the most likely scenario for the recovery will be something like what one analyst I saw describe as square root shape. We are seeing a bounce, but I think we will have another recession soon if the taxes go up as many are saying they will next year, and of course as the “business as usual” policy continues.
On the foolishly optimistic side, we could see a history defying economic boom from here on out. I believe in the USA, so I am certain we will do well at the very least. As Americans we can all look forward to the next great road bump, they are hard to deal with and painful, but we need them to wake us up and keep making this world a freer and better place for us all on Gods Green Earth.