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Financial news I consider important, with my opinion, which is worth as much as you paid for it.
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Monday, January 31, 2011

This Week without Charts - Egypt

This week I bring you no charts.

Primary reason is laziness. The charts are not going to show any major changes from the last two weeks.

What is a major change is the political unrest in Egypt. I expect by Friday the market to have been influenced by the Egyptian politics as it unfolds. I also can't see how the current ruler can remain in office. After 30 years of rule, his last minute ditch efforts to gain support will not work.

The real story isn't just Egypt, its the fact the middle east has quite a few governments that are operating without representing it's citizens. Many of whom have been helped kept into power by the USA.

Notice that technology has helped the citizens organize and in effect "uncover the inefficiencies" and take on the status quote. This theme I believe will be repeated for the future of US currency policy as I posted.

If the destabilization in the area spreads, expect oil to soar. I expect oil to soar anyway, just because of the situation. But a little skittish oil pricing is forgivable for a week or two. I am more concerned over a few months or year.

So for now, its see how the markets react. Watch natural resources, oil, gold, and USD as always.
BTW, I fully expect this situation to help push the US treasury rates lower, buying more time.

Sunday, January 30, 2011


Just a quick short idea, my old buddy DECK.

The Bigger Chart Picture

A few charts for you today, to put us into context of history.
First, I give you a chart created by Gary over at the Smart Money tracker.
I won't repost/steal everything Gary said. Go to his blog by clicking on this link and read.
The short story, the market is WAAAY out of wack above the 200 DMA. Revert to the mean is the worry by any prudent investor.

The second image is how the S&P 500 from 1973 to today. Just to put into context where the historical highs and our current position, and some general trend lines.

The last image is most critical. I really doubt Ben Bernanke over at the Federal Reserve bank wants to show a change in the 30 year bond rates, from declining to increasing. A stock market crack would drive rates down as it chases people into bonds. Chart from "TheChartStore.com". Another great pay service.

Saturday, January 29, 2011

Why Natural Resource assets is better investment than US Bonds

My friend John Chinnock posted his view why US bonds are the safest place to invest in this time of economic uncertainty back in October 2010. I have been thinking of a response since then, like a second job perpetually coming to the forefront as I stole bits of time out of my life. My poor wife sometimes has to deal with my focus drifting to the ether of thought of global financial doom. Hopefully I can soon put this blog to bed, as I brain dump the culmination of my learning the last 4 years about world financial pressures, peak oil, natural resource problems, and global demographics.
The truth is, my time would be better spent focusing on two items, my job and my family. I need to keep an eye on the financial picture, but at a healthier distance. My goal is to reduce time spent to 4 hours on a Sunday night, to update my view. Watching each step daily is counterproductive to my immediate financial wellness and happiness.
So this post is a step closer to bring my view to an articulated summation, culminating with key metrics to watch over time. My goal is to stick to these key metrics, and provide periodic updates as I burn those Sunday night hours.
On to why Natural Resources is the right choice for investing.
Global Economic shift
The USA has about 300 million people and is by far the largest consumer of world resources. It is dependent on energy from foreign sources, manufactured goods from china, and food from south America. The consumption of Americans has become a surreal iconic image in the world view. I am part of this iconic image, being a fat, over-consuming, indulgent American. I haven’t taken an oath of poverty, and I have benefited from this resource consumption imbalance.
But times are a changing. China and India have about 2.5 billion people compared to the US at 300 million. I believe the goal of Reagan back in 80’s was to awaken this demographic in a hopes to help perpetuate global growth. I suspect his administration first spotted the demographic imbalance ahead as I described in my post titled “Demographics is driver to economic growth”.
I am of the belief that the awakening of the economies of these two countries will forever change the future of American’s quality of life. I have posted this already on why, please see post “China V America” on why.
The upshot is, as China and India population grows with improved economic wealth, the US cannot possibly maintain the same percentage of world resource consumption. I don’t think it is a far stretch to expect 2.5 Billion people to consume more than 50% of all resources produced. Heck, I could see those countries DEMANDING 90% of the world resources, as economic powerhouses of consumption, taking the crown away from the 300 million US citizens.
Whatever the evolution of resource consumption is, I can’t imagine it will be good for Americans lifestyle. For the consumption of fewer resources will come in the form of more expensive resources. After all, I doubt Americans will consume less, if they can afford more!
The question then becomes what resources to invest in? Frankly, here you should apply your own thought and seek advice other than me. However, I can’t help but give my spin.
OilPeak oil is real and is here. The concept is the wells pulling out of the ground are continuously decreasing in volume produced. This is a fact of all oil wells. Historically, the world has started new wells to keep up with this decline in oil production, and to exceed total output. But the problem is the larger wells are accelerating in the decline. New oil isn’t cheap to get. It has to be in more expensive areas to pull, like in the deep sea. It also may not be as “clean” and need more processing. Two critical facts will make oil more expensive to produce and demand is not curbing. Already America is demanding more oil than the economic peak of 2007! China and India are unstoppable forces of increasing consumption. This race to consume more will soon hit the wall of production, oil at 300 a barrel in USD will be seen in the next 10 years. Maybe 2011? Who knows.
Energy in general – Due to peak oil, investments in alternative energy, natural gas, coal, nuclear, and other related industries are all good. As oil becomes more expensive, other energy becomes more viable and will be consumed more as shift way from oil becomes required.
Precious Metals – I have blogged many times, I do not believe gold is money. I therefore do not like gold as an alternate currency. It is frankly, insanity. Gold as money works in a mad-max world. I will not spend my life planning for mad-max. However India and china cultures are in love with gold. As 2.5 billion people can afford to spend more disposable income, one common theme in both cultures is buy gold! And of course, the alternate reason is there are plenty of people who do view gold as money. For whatever the reasoning of people purchasing, I expect gold gold gold to the moon. I can easily see gold at 5,000 an ounce in US dollar terms. Silver and others are in the same boat, but for just simple reason that as India and china grow economically, demand will rise for all resources, including silver.
Mind you, the road may include a gold price collapse, for it is the ultimate ponzi scheme. If the world financial markets fall, I could see gold hitting 1,000 an ounce. I doubt we’ll see it fall any lower, as the buyers in such a fear market will step up, as they did in 2008 at around 800 an ounce.
For in times of fear, people buy what they know as a value store, rather than what they don’t know.

Food – Food embargoes where experienced in the 2008-2009 economic crisis. Once the flow of funds and credit dried up, countries where quick to cut off exports on food needed to feed their own populous. The world inter-dependant on feeding each other is a precarious situation. The moment food is viewed as a critical resource to keep a population happy, exports will be cut like a chain reaction.
Example, Americans gets its fruits from south America in the winter. If the supply is cut off for whatever reason, Americans may need to cut exports of their excess winter food production to other countries to stock shelves with alternate nutrition. This could cause a chain reaction and crisis. Luckily America is well positioned, as we net produce more food than we consume. We may need to go on a diet, but I don’t think we will go hungry as a nation.
The tight food supply combined with bizarre weather patterns continuing to evolve, and food storage reaching unprecedented lows by world governments, has placed the global food chain in a precarious position. A decade ago large food deposits had to be kept in the food chain, minimizing price shocks due to supply disruptions. With advancements in shipping and computerization, the food chain is more real time and can amplify crisis costs.
Rare Earth Elements – Although akin to precious metals, rare earth elements deserve their own category. Rare earth elements are materials mined that are located in very limited known locations. Currently China manufactures about 95% of the global rare earth elements. In an attempt for China to control world manufacturing, and to keep internal resource costs down, China has announced limited quotas for exporting rare earths. Further, China has used exporting rare earths as a political weapon against Japan, to in essence blackmail the Japanese government to comply with Chinese desires.
Rare earth elements are used to make solar panels, ipads, some cell phone components, some batteries, and many high tech items today. Companies have announced plans to re-architect manufacturing to use alternative materials than rare earths to minimize the grip China has. That is easier said than done. Some things in life cannot be made any other way (for practical use) than a specific material. Try to build a house without wood or plastics or make a computer chip without silicone. It can be done, but it may not be practical or economically affordable. I’m sure its possible, I’ll check back in 30 years to see how progress is going on your project. Point is, to simply state the world can work around this issue is na├»ve. Rare earths will continue to grow as a critical resource for high tech solutions. There are new mines being built in reaction to the reality the world has realized it is in. I for one am watching a stock called AVL. If it hits 5 bucks again, I may do some crazy buying and be a core position.
At a high level, rare earths used 100 years ago… I doubt anything worth recognizing. Last year? The threat of not getting rare earth materials to Toyota for their electric cars was enough to cause the Japanese government to cave to China’s will. The use of rare earths are on a upswing, an I believe, we are witnessing its infancy of recognition of the materials importance.
Currency - As several recent posts have articulated, America is playing a very dangerous game with it's currency. Currency valuation is faith based (fiat). So by definition of a fiat currency the majority believe the USD is stable, and not headed for a crisis. And typically the majority are on the wrong side of investments. As a fiat currency, faith in the USD must remain strong to maintain value. Hussman funds has in detailed describe the toxic financial chaos, the USD is poised for devaluation due to currency abuse. I have posted how the Federal Reserve Bank, a private institution may tap US tax dollars to cover it's losses, circumventing the constitution. Also how US Bonds is based on a mathematically proven model that cannot be sustained, based on exponential growth. Logic above aside, the indicator I am watching for USD trouble is when US bond rates breaks the trend established in 1985. A canary in the coal mine may be Japan, as their credit rating is starting to degrade, as their debt levels approach taking the crown in the world.
Please keep in mind, my view may be a little slanted, as I see currency needs a rebirth, away from asset (gold), or Fiat, to a new, more pure system. This reality will occur as computer systems assault the current people based currency system , responding quicker and more violently than can they can react to. Technology will break the current system and require a new monetary system as the fundamental flaws become exposed. It is possible to save the existing system, if rule of law returns and the system is made whole again. I doubt this will occur without a crisis.
The goal of choosing resources isn’t to become a multi-billionaire, although that is possible in any investing, worse odds than buying a mega-millions lottery ticket. The goal is to maintain purchasing power for your lifestyle. Natural resources are needed by everyone. And investing in companies related to natural resources tend to have an amplified effect on their earnings. For the companies valuation isn’t just about their production and sales THIS year. It is also forward looking on all the resources in the ground they have rights to yet produce. Their valuations can soar as a multiplication effect of the price of fossil fuels, precious metals, and rare earth minerals. Food isn’t likely to have any amplification effect, but could have some crazy spikes.
So to invest in the future of a economic growing world, I can’t see how natural resources across the entire spectrum of energy, food, precious metals, and rare earths, can be a loser over the next 10 years. And if we do arrive at some sort of mad-max world financial crisis, natural resources are always needed. I can’t say the same for UGG boots or US bonds.
As an added bonus, if the USD does suffer from loss of faith as a currency, which I do view as not likely in the next 2 years, being in natural resources protects purchasing power.
So whether resources go up in price in reaction to currency problems or just plain demand, I would find it impossible to flip from bonds to oil at 200 a barrel or gold at 3,000 an ounce. The charts would look like its over-priced ready for crash. I would be like a deer in headlights unable to move out of bonds. For this reason, I recommend everyone have a core position in natural resources across all areas while prices are in historical ranges. Everyone has to decide what they are comfortable with, 25%? My goal is 75% in natural resources or more.
For the remaining investments, please consider fixed income CD's, please see post Best Strategy for Fixed Income Savings for more information.
In another post, I’ll assemble ETF’s and individual players worth considering in each sector.

Friday, January 28, 2011

Blog is now a PODCAST

I added a widget that converts my blog into a Podcast. Click on right to subscribe.
Or above each post, click the listen button. Cool Tech, have fun!

Canary in the Coal Mine - Japan?

Japan is much further along with demographic issues, and sovereign debt problems. Their debt level is 200% of GDP. The ONLY country with worse debt to GDP is Zimbabwe. And their currency hyperinflation was at 6.5 quindecillion novemdecillion percent in 2008, when that government gave up on their own currency. So Japan is right around the corner to having a WORSE debt to GDP ratio than Zimbabwe. Good luck Japan!

As a plus, the majority of Japan's debt is owed to themselves. So if their country implodes, most of the losses will be their baby boomer generation, not the world.

However, since their issues are leading the western countries, they have been quoted as the one to watch for the coming sovereign debt crisis ahead. Today, we have our first small rumble.
What does this mean? Well at some point, if their credit rating gets cut far enough, we may have yet another Greece on our hands. And unlike Greece, Japan isn't part of a group of countries committed to save it. Of course, I fully expect western countries to come in and push themselves more into debt to stabilize Japan if it starts to have a interest rate problems with issuing new debt.

The problem is Japan has spent their life savings, and in return, they have 20 years of a depressed economy. And now, as their baby boomers need cash, there will be no capacity to borrow more. I fully expect Japan to implode over the next 10 years. Either having their debt rating cut forcing rates up, or their currency to collapse.

The big question is, does America have enough clout to remain stable at the record debt creation level it is on? I am guessing yes. I believe all the smaller countries will be kicked to the door to give America a longer lifeline on its debt. In effect sucking the extra bond money out of the entire system as each smaller country destabilizes.

In any event, as yesterdays post shows, this game must end, one way or another. I believe in the law of math, the rule of science, and not in fables spun by politicians of faerie tales, unicorns, and a never ending boom just around the corner as the human race heads towards a demographic peak.

Thursday, January 27, 2011

Mathematical explanation for pending global crisis(es)

From various angles I have covered why I believe that all is NOT well, and that the worst is ahead, and not behind us, from the 2008 crisis.
The root causes of the 2008 have been completely ignored, as we move full steam ahead in an attempt to prop up balance sheets through "new accounting rules" that promote better earnings. All the trickery used gives the illusion that economically things are better, but valuations in stocks, interest rates, etc, do not indicate the component where rules have changed that drive those prices.

In effect, I believe The Federal Reserve Bank, and others are 100% responsible for the next crisis, due to their attempts to make things look better, in a vein attempt that my "making people feel better" they will purchase more, and we will enter into a wonderful new 40 year boom.

I am not a believer.

I ran across this video, "Are Humans Smarter than Yeast?", that does a fantastic job of explaining how exponential math works, and how all exponential system result in some sort of a wall, or failure.
The video is a little rough, the narrator voice isn't the best. Focus on the content, and understand, it is not possible to have exponential growth indefinitely.

Without knowing the details of every economic model, every facet of economic theory, this basic mathematical principle should give pause for thought.

However, this does not prove that our over-reach to perpetuate infinite exponential growth will fail tomorrow or in 2 years. The point is, the actions today are not focused on bringing economic systems back to reality, instead, the actions are focused on "extend and pretend" to continually show the same growth rate as before.

This goal is mathematically impossible. The result will either be a worse than 2008 (over time) collapse OR a collapse in the USD valuation, which will result in the same real term valuation being realized, by changing the valuation of the measuring stick, the dollar. For the underlying exponential growth cannot be sustained, and the laws of mathematics will force the reality upon us in some way.

I have added this to my "Financial Ground Zero" Series, as it does a good job of explaining how the insanity being pursued by the financial players will not end well.

Tuesday, January 25, 2011

Ideal form of money – empower the people

For centuries money was based on gold, and some civilizations successfully used fiat currencies for a while. However each form of money has failed to serve man’s purpose over centuries. This is because each form has flaws, and each is not a pure form of money.
Please refer back to my post on “what is money” to understand my position of money in detail. In essence money represents a debt. For example, I give you a bushel of corn I grew; you give me an IOU, and may give back the IOU to make me shoes when I need them.
For sake of argument, there is no difference between a US dollar and “credit”. Both represent the same thing, a debt owed for work done.
The problem with fiat currencies is abuse of the system. It is easier to produce no work, and just create money to get work. This has been the downfall for all fiat currencies throughout time. I recommend you watch the video on my post “Niall Ferguson: Empires on the Edge of Chaos” on to how this manifests.
The problem with Gold is, it doesn’t represent work done and a debt owed. It represents a physical material that it has value as a material. Therefore new work done cannot be symbolized in the form of money, without waiting for some miner to dig it out of the ground, manufacture it, and distribute through the banking system to my account.
In essence, the society can be only as prosperous as the mining production to generate credits for “new work”. In some cases of work, such as I mow your lawn, then you shovel my driveway create a wash, but the gold coin still must pass along the economy, and is required to do another activity.
And at any point, since the gold does represent physical value for material in jewelry or other uses, people can simply melt coins to be used for their business and sell for a higher amount of gold coins in return. Or worse yet, the rich accumulate the coins, removing them from the system, creating money shortages for the less wealthy, causing severe depressions and economic hardships on the have-nots.
The whole idea of gold as money outrages me that people cannot think of money in its purest form. It is suppose to be a guaranteed bond, akin to signing a contract, which work performed can be used to get work in return. It is universal, meaning the person who gives you the currency doesn’t have to be the same person you give it back to.
The problem comes in that individuals, companies, states, or governments would rather just make new money than create work to back the new debt created. This perversion of not having money represent work done and work owed is what we are witnessing by the actions of the Federal Reserve Bank. Ben Bernanke, in effect, is trying to show the world, that US does not have to honor repayment with new work, it can repay with sleight of hand and new paper IOU that will never get repaid with work. It is a dangerous game, which has shown throughout history to typically end with the loss in faith in the currency and destruction of the government’s ability to operate.  ** UPDATE ON THIS VIEW, "Bernanke Villain or Hero"
I am more concerned over Ben Bernanke than Osama bin Laden. Americans are aware of the dangers that the concept that Laden and others promote. To kill thy enemy at any cost, with most impact possible given the resources at hand. While Mr. Bernanke is put on the covers of magazines as man of the year and he himself takes credit for taking actions to “make people feel better so they spend more”. In that single statement, admitting, that he has not taken fundamental actions to make the situation improved. Unless you consider feelings as equal as a promise kept and law enforced.
Current Money Summary
Currently, there is two views of money, Fiat and gold based. Both also can have credit issues against them, generating their own form of new money. In both cases they have weaknesses. One for abuse and the other for holding back prosperity of the people. I recommend watching the video “Secret of Oz” for more on this background.
New money attributes
Once again, the problem is societies knee-jerk reaction is to answer with what you know. By choosing past money systems that have repeatedly failed in history, we guarantee the money system will fail again. What is needed is an improved form of currency. One that can do the following.
  • Enforces that work done is repaid with work done. If work isn’t repaid, that money is lost, and the impact is against the person or company that FAILED to repay the work. They take the hit.
  • New Money can be created literally out of thin air. All that is required is you perform work, and someone else receives the work. The one receiving the work now has a debt in life that must be repaid. This of course, is called credit. When you have no money, but need to create money out of thin air.
  • Amount of credit given to an individual is finite, determined by an open market competing for your business. For example, if GM needs more money, it can obtain credit from the market place (creditors) at a rate of interest determined by the market place. A free form of pure capitalism is required, and transparency into the applicant’s finances is crucial for this to work.
  • No one entity can create new money outside of the process. There is no grand puba called Federal Reserve Bank Chairman that can bequeath new money unto the minions of society. A fair system for all to ensure that work done will be paid back with work done.
  • Money can be freely transferable to anyone the possessor dictates. This transfer is automatically subject to taxation, with no exceptions. Perhaps a 1% flat tax across all of societies work effort. The tax is to ensure the business environment is concussive for work. This will provide incentive for governments to improve work conditions, as it will generate more tax through more business being done. The government carrot is in effect, like the profit of McDonald's. More business done = more income.
  • The system is secure, provides transparent accounting, and is governed by an open board. All work done by the board to propose changes to the system (refinement) must be done on a public web site, subject to public voting and public approval of EXACT changes being instituted. All new rules subject to 12 month revocation period by the same public voting system.
I have a slightly slanted vision, based on what I know, computer systems.
What I envision of course is a computerized marketplace where all money is stored electronically. It may in fact be a global currency. However, I am NOT in favor of a global currency, as such the risk of global failure due to corruption is too high. Instead I think what is required is to allow any company to create a system, using open review and process, to be a viable storage of wealth.
Electronic Money
For example, EBAY could create it’s own form of money, and then interface it’s money using a “currency exchange rate” to Amazon. Only in the spirit of private competition coupled with mandated open transparency can result in an evolving framework that will result in an optimal system. Over time, the currency systems that are found to be the most trustworthy will rise to the top.
Let the marketplace of ideas and private enterprise provides a solution. One of the solutions of course, I would expect would the equity exchanges, future markets, and other financial systems. The monetary rate of exchange between systems must be an open, market place where rates are found in a capitalistic fashion. No backroom deals to gain unfair market advantage.
Alternately, a single entity could be created by each country, separate from the government. But I suspect the same human tendencies to corrupt would creep into the system, as always happens with a monopoly.
You may be surprised to learn, that this is already occurring, in a form of new money through a web site called listia. They provide trading of goods without money. But they have a form of credits to help even out the valuation differences of exchanges. I think this system is just a small example of how this would work, but what is also needed is strong transparency, strict financial accounting, and public review of refinement to gain and maintain trust.
With such a system, the goal of allowing new money to come into the system can be accomplished with credit, objects, or services performed, allowing the economy to grow. It also enforces that no one entity can create money at will, that the same process is used for all. That governments or private banking cartels do not have a monopoly access to money creation. This practice is what introduces abuse, currency collapse, high inflation, or just plain old lawlessness and fraud. Unfortunately I doubt my vision will happen in my lifetime. People will try all they know to stick with “what they know” and not dive into “what they don’t know”. For now, it will be Fiat currencies and asset-backed money, both issuing pain upon mankind until demands for a new system emerges.
Such a system could be tested at first in different sites, organically growing as weaknesses are exposed, correct, improve, repeat until a tight, fraud resistant system is established.
Back to RealityI suspect if there is a US currency crisis, the solution will be a new global currency, ripe for same abuses. Or a basket of currencies that represents the single currency, gold, etc. There are multiple reasons, first, people answer crisis with what they know. Second, those who have control of money supply of course, want to keep that control. So the evolution into a new, better system is likely to be a pipe dream that may become a reality long after I am dead. In the mean time people can experience the error prone road of reverting to failed systems in an attempt to fix the prior broken system. And only after other refined broken models are proved flawed and discarded, with a new one be sought.

Next up, Economic and Monetary Inflation and Deflation.

Monday, January 24, 2011

Short idea - Buffalo Wild

I have learned my lesson about shorting, its for truly brave, stupid, or lucky. When the world wants stocks to go up always, its tough to bet against the world.
One of the rare shorts I have left, and my biggest, (no not DECK!) is BWLD. Recently it has been giving me love, something I haven't gotten from a short in years!

But it is at an interesting chart support level. If it hits say...40 bucks a share, pretty good chance it will take the express to 35, if not lower.

See chart below. This is not a recommendation to buy or short, just a chart observation for the brave, stupid, or lucky. :)

This Week in Chart

I am not going to bother with the usual line up with charts. Frankly, not much has changed since last week.

I am however going to focus on the S&P 500. Specifically, the market looks to me overstretched on the up side, and pending for a pullback. Fat chance I get short anything, since shorting in this game is a fools hobby. Instead I am waiting for a pullback that is far enough to re-load on natural resources.

NOTE, I have been quite verbose of recent, consider reviewing some of my recent posts, if you haven't already. Posts FRB circumvents constitution, Demographics driver economic growth , Food costs rising, and Comex raises reserve requirements.

To the Chart!

Sunday, January 23, 2011

Federal Reserve Bank circumvents constitution

As previously discussed, only one institution in the US government is allowed to spend taxpayer dollars is congress.

However, as reported by CNBC, the Federal Reserve Bank has sneaked in an important accounting rule change, that puts the taxpayer on the hook for all losses it incurs. In effect, the private (it is not a federal government agency) can no longer go bankrupt, and may spend money, make purchases, and back bank assets without fear.

As for this change being unconstitutional, well, the constitution only matters if the law is enforced. In this case, I doubt this will be challenged and the constitution upheld. For the Federal Reserve Bank is stepping into the marketplace to prop up the US financial situation.

This is a huge blow for those who point to the US dollar as being a world reserve currency, and therefore cannot implode. The keys for the currency valuation have been given to a private banking organization. Therefore, we are in new territory. Once cannot look at the history of American currency since 1913 as a guide.

For more commentary, I highly recommend everyone read other bloggers, more verbose and detailed than myself. I have provided links below.
This event goes into my Financial Ground Zero series, as I highlight events that will eventually likely result in USA financial collapse.

Hussman: Fantastic detailed outline of Federal Reserve Bank monetary pressures "Sixteen Cents: Pushing the Unstable Limits of Monetary Policy"


The most popular article on my blog is USO vs USL. Even through I don't trade these etf's much anymore, I felt obligated to update the post.

Since then, USO has continued to lose vs USL in price, continuing the trend proving USL and DBO are better oil ETF's than USO.

The second image shows how Oil company ETF OIH has been better than all the oil ETF's, and that gold ETF GDX has also done great. Click here to change time periods and add other ETFs to compare against.

Demographics is driver to economic growth

When reading this post please do not get discouraged about the negative view in the first part of the post, there is a positive ending. I encourage clicking on links to read up on details of other concepts already covered. Grab a coffee, throw some tunes on, and prepare for the rant of all rants , exploring the driving causes of the global crisis.
Demographics is the core issue to economic crisis.
Population demographics is key to promoting growth in all areas if human economic health. The US baby boomer generation is a classic case of how that demographic propelled US economic growth after world war 2. The baby boomer demographic effect was jumpstarted with the end of World War 2, and the US production capacity was in-tact, while Europe, Japan, and other countries involved in WW II production capacity was damaged. With the end of World War 2, America experienced economic growth at first due to the production differential, then extended through the life of the Baby Boomers.
I encourage readers to seek examples of this perspective if needed to understand how key demographics is to economic growth. I myself have posted a similar thought relating to asset price increases in my post “Pyramid Valuation scheme”.
More recently, Japan has been a text book example of the opposite effect of demographics promoting economic prosperity. Japan does not have significant immigration of newer, younger workers, while at the same time the demographic has aged. Japan’s population is entering retirement in significant numbers, resulting in the population skewing to cost vs income. Japan, unfortunately, is entering into this period after pursuing for years Keynesian economics of burning through the countries life savings in an attempt to promote economic growth. ( The US has always done the same, but has only entered into extreme spending since 2008. )
The result for Japan is as their population shift creates an economic imbalance that cannot be possibly be supported by the number of retirees vs number of remaining workers occurs. Japan’s debt to GDP is about 250%. Meaning, if Japan’s economy produces X, the deficit is 2.5X. As anyone who looks at their own personal finances, it doesn’t take a math degree to see this trajectory is headed for Japan failing as a nation. The “good” news is, if Japan’s government collapses, the event solves the economic problem. The “bad” news is, the retiree’s quality of life will be destroyed, and the transition for the Japanese may be a violent one, resulting in a government that may not be democratic.
At the heart of the world economic issues lies this demographic problem. The US and Europe have a similar demographic wave now approaching the same problem. The US is ramping up deficit spending AHEAD of the financial crisis of the boomer retirees. In effect spending the countries life savings to try to maintain quality of life. Similar to Japan’s approach, this is assuring that when the baby boomers need Social Security, Health care, and other services that US WILL NOT be able to able to provide these benefits. Alternatives can be to deny payment of services. However, my economic pessimism comes into play here, where I do not see the strength of leadership to pass legislation to slash benefits of pensions and government services to the aging generation AHEAD of a financial crisis for the US government.
Combine this baseline economic driver, with dependency on China, foreign energy, illegal accounting methods prior to 2008 causing massive mis-allocation of resources, a perfect storm is a brewing.
The good news for the US, if you can call it good news, is other countries have problems that may be worse than the US. Europe has more fundamentally economic issues than the US in some aspects, resulting in the current crisis-of-the-week for their country members. Canada and Australia in 2011 will enter into a real estate crisis, driving a similar banking crisis that America has already entered. Further, China has engage in practice of burying its financial problems by diving into country wide real estate ponzi schemes, producing entire cities built that no one lives in. What we have here is global economic hot potato, where each country tries to make sure they don’t lead the world into the financial abyss.
But I digress. Back to point of Demographics as the underlying issue.
The world is headed towards for the first time in human history, to be a race that is contracting in population rather than expanding. It is debatable when the peak of human population will occur, 2030-2060. Counting which year it occurs missed the point. Since the dawn of organized governments, a shift is near. This shift is driven by the westerners producing less than 3 offspring per couple on average. China has a law making it illegal to have more than 1 child per couple, assuring their own demographic crisis sooner than expected. Only India has a health demographic promoting endless next generations of people to promote economic demand.
This global demographic peak will cause catastrophic economic results under our current economic system. Just about all aspects of asset based resources has depended on a ponzi-type scheme where the next generation is larger, and can absorb the previous generations debts and create demand for assets. (This is focused on number of PRODUCTIVE people vs social recipients or retirees) The mere fact that humans have never experienced a global downward shift in population growth should send loud alarm bells off that society is not prepared for this event.
Now that the problem is well defined, lets explore government re-actions.
Government Actions to mitigate the pending crisis
A key point to understand about all humans is that they answer a problem with what they know. Very few but talented people are able to answer a problem with information they do not know. Let me give an example: Let’s say I ask you to create a filing system for a doctor’s office. How would you do this?
Most would likely answer with buy filing cabinets, and some sort of paper indexing system. I’d propose an electronic system where the office would be paperless, using computer software. Yet other people may have different answers. I could write for pages on ways to solve what up-front seemed like a simple problem with a different answers.
However, the key for this discussion isn’t what the BEST solution is. The key is to understand that the person responsible for solving the problem chooses a solution they think of. Also, out of the solutions thought of, which is economically viable. These two factors, able to even think of a solution, and able to fund the solution drives to what the solution selected becomes.
This is a true problem in society, where the best solution is often not chosen due to lack of knowledge or short term economic affordability over long term economics. I witness this daily in every problem I observe. Luckily I work with some key people that are well skilled in answering technical solutions with what they DON’T know. It’s difficult, made easier by Google, and it’s the right approach.
Ben Bernanke of the US Federal Reserve bank is viewing all problems through the lens of a banker. Ben’s has approached the issues he sees by responding to the problem that many banks are insolvent. By Mr. Bernanke by buying debts at prices inflated by 50 to 75%, printing money and give it to banks at near zero interest rates, paying banks interest on money they deposit to fed (and originally given through purchases!) he has responded to the current problem. There are many other examples of Bernanke’s attempts to prop up the financial system. The problem I have with Mr. Bernanke is his lack of imagination, and he answers with what he knows. But his role in life isn’t to be imaginative. His role is to do EXCACTLY what he is doing. To be a tool of the banking establishment, and answer problems the way a banker would answer them. For this, I give Ben an A+++, he has done a superb job of answering the financial crisis with steps to push out a global banking failure. A tip of the hat Ben, for a job well done to meet your goals.
But these actions do not attack the heart of the problems, which include demographics. Demographics isn’t the only problem, but it is by far the lion share driving the crisis to a head. It is a race against time, until the baby boomers tip the western countries into insolvency. No amount of financial banking ponzi schemes can avoid this crisis. Ben can react to crisis, he can kick the can, he can even inflate money supply in an attempt to make paper assets look great. But a quick fix often leads to a quick fall. It is not a solution, and Ben’s own words prove this. When you listen to Mr. Bernanke, he talks of “to induce consumer spending, the goal it so make the consumer feel confident to spend more”. How does this solve anything long term? Shouldn’t economics be based upon growth of industry? Growing economic fundamentals? Technological innovation to drive productivity? The answer is simple, that’s all Ben can do, he answers with what he knows and is allowed to do.
So the problem isn’t Ben Bernanke directly. Ben, unknowingly is driving the crisis to much worse levels, by delaying reality and allowing leaders to avoid dealing with core issues facing society. After all, drastic steps do not need to be taken, all is great! Just look at the stock market. Ignore 9.6% official unemployment, upwards 16% true unemployment, and skyrocketing debt. True growth, according to Ben’s own words, is making people feel good. And soon, we can expect this to solve the demographic driver?!?
Obama has done similar with what he knows. He tried to pass legislation to attack the health care benefit cost problem that the baby boomers are bringing. If he had succeeded, the government could have forced doctors into debt slavery, to have them bear the cost of funding retirees health care. That combined with Social Security being indexed against inflation EXCLUDING energy and food, two of the biggest monthly cost for retirees, would have kicked the can further for the crisis the baby boomers bring to the government balance sheet. The problem of course, all of this is a band-aide. Obama, who is not a visionary of change, answers with what he and his staff know, legislation to kick the can. Again, I am not condemning Obama, he just lacks the capability to answer with what he doesn’t know. In short, he is not a visionary. Him and majority of congress answer with what they know, legislation in can-kicking.
There are many other actions being taking by various governments. From what I have read, the common theme is answering a problem with what they know, None are answering with what they don’t know.
What we know
Let’s look at the “what we know” as answers that could solve the problem, but no one wants.
Possible “what we do know” solutions
  • Cut benefits, those who retire can live by kindness of others or work under duress until you die.
    NOTE: Wages would drop to minimum wage for lion share of retirees, due to too much demand for a job to live.
  • Have a global event where the aged are permanently retired, possibly through disease. (h1n1 event?)
  • Force the younger generations into debt slavery, raise taxes to 50-75% of income.
  • Encourage people to have kids en mass now, and prepare those children for the workforce by as soon as possible, time is of the essence to serve your elders!
  • A complex mix of all of the above.
Throw in one or two others you can think of. Perpetually increasing population through births has problems that make it not a viable option. Society cost of investment into child rearing at a time of financial duress, natural resource shortages caused larger population, and society willingness to bear more children.
Point is, all are painful events no one wants. The problem is hard, and a solution must be either painful or NEW!
What we don’t know.
This brings us to where I have hope, answering what is a global human race problem, demographics shift. Such a problem deserves to be thought of as solvable ONLY with what we don’t know. After all, this is a new problem in human history! Those who think pulling paper levers, re-architecting social ponzi schemes, are not thinking at the correct view level. This problem must be attacked at it’s heart, how can the demographic issue be mitigated.
The answer therefore does not lie in money, or can kicking.
To arrive at what we don’t know as a solution, first, we need to analyze the issues derived from the demographics. They are:
  • Ability to work is directly correlated to physical health. So able to be a productive worker can be linked to age-related health issues.
  • Willingness to work is often related to perception of lifespan. People work their entire lives dreaming of the day they can “retire” and take it easy. Most cannot be inspired to work hard at age 75, when they believe they are about to permanently retire. Lifespan effects willingness to work.
  • Cost of health care unto society skyrockets with age. (related to ability to work)
  • More workers than retirees - In essence, further kick the can by having more people producing than living off workers. Or alternately if possible construct demographics to be perpetually structured this way.
You may think of other problems retiree’s bring society, but from a financial perspective, I believe this captures the heart of the big problems.
    I ran across an alternate solution on a podcast on Futures in BioTech. What if, we could extend people’s life expectancy? What if, instead of average death at 80, average death is 100, or 120?
    What if, the diseases that come with age, are equally pushed down the chain, by 20 to 40 years? (News 5-22-12)
    And given technology, if we can push the demographics out the new time given to society will likely bring yet the next innovation to kick the can further. (I find it disturbing that I find myself proposing a can-kicking solution, but more time will allow for the next solution.)
    Think about it, if you knew with relative certainty, your lifespan would be on AVERAGE 100 in relative good health, working until 90 is not that crazy. Lets look at the “burden” of cost for each person’s unproductive years. Currently in USA, using average life expectancy rates.
    Age 0-21, and 65-78, 34 years requiring support, with 44 years work. 56% productive.
    Age 0-21 and 87-100, 34 years requiring support with 66 years of work. 66% productive.
    This produces about 17.9% gain in productivity! That is absolutely huge!
    And of course, if life expectancy can be increased to 120 years on average, the gains are unbelievable.
    Now, how realistic is this? The genes have already been found and current research is underway right now to show how to increase lifespan in mice. I doubt these early trials will yield a solution, with lack of funding, many years of testing lies ahead to find the right solution. But if society targeted areas of what we don’t know to solve for the demographics issue, the solution would be found sooner.
    Such advancement would delay cases of age related diabetes, cancer, dementia, and other diseases. Each human would have a longer period of higher quality life, extending the quality of life we have accomplished in the last 100 years through physical environment improvements.
    In this case, I would expect people gladly having their life expectancy extended to 100 years, in exchange for working until late 80’s. The ultimate “what we know” is we want to live.
    The demographic crisis or other core society problems need more answers with what “what we don’t know”. More brain power is needed to creatively propose solutions on addressing the underlying problems society faces and less to dissecting the unfolding of the global financial crisis like critics of a bad movie. Extending people’s lives is by no means the only answer, or proven possible and affordable. I encourage others to propose a creative solution that is realistically supportable by the will of the people. The financial crisis is a reflection of the underlying society structural problems; it is not the root cause.
    I am a little skittish about the presenters credentials, but good speech.

    Interesting video about overpopulation not at root to poverty, just the opposite.
    UN projections for population growth

    Video on extending human life

    Friday, January 21, 2011

    Food costs rising

    I did a double post today, check out the previous post (click)

    There are signs food prices are rising not just in America, but around the world.

    In America, General Mills, Kraft And Kellogg Hike Prices On Selected Food Products. Granted this is really a non-story, since it is indescribably small impact.

    But in an economy that has 9.5% official unemployment, and 15%+ unofficial, having food prices rise is directly opposite of what classic deflation-ists say can happen.

    Further, there have been food riots

    Oh yea, just to really get a nice topic of conversation on food problems, the bee population is taking a hard nose dive. This is unprecedented and critical for food production.

    Americas desire to avoid pain by printing trillions of dollars and flooding the world with US cash is a big contributor to accelerating food problems couple that with food production issues. Ben Bernanke, is in fact exporting death across the world. Luckily for me living in the USA, it has helped me maintain my lifestyle. But that isn't the point, this will not resolve well. We are going down a very nasty path, and its full steam ahead.

    I stated back in 2008, as resource inflation grows, Americans income will have increased amount spent on resources. What I failed to realize is in the process poorer countries will get crushed, since they do not have as much disposable income to handle the increase in resource costs.

    Marc Faber explains why as resource prices increase, western countries should fare better then developing nations. I think this spells disaster for international co-operation in the years to come.

    Comex hikes margin requirements for some commodities

    On January 5th, I posted about the intent of the Futures Trading Commission to clamp down on large positions in futures. That event will take months to come into effect. I stated that any regression of commodities due to this action would be temporary, and that speculation is not the root of commodity price jumps over the long haul. Speculation price spikes can only happen in a market where the spread between production and demand is tight.

    Recently commodity prices has been falling, and Thursday we know why. Comex today raised margins requirements for gold and silver by 6%, along with some other commodities. The recent price declines I suspect was big money with the inside scoop lightening positions to avoid the required sell off to meet margin requirements.

    Of course, I am wrong, since that would be illegal for insider trading information on government regulation changes......

    In any event it will be interesting to see what this, and future steps will do to commodity prices. But make no mistake we are in a commodity bubble run, being fueled by all the loose money finding a "home" in commodities.

    I am basically waiting for Gary of the smart money tracker to give a green light for gold and silver for me to reload.

    Thursday, January 20, 2011

    World Economic Forum releases report

    The World Economic Forum (WEF) is a Geneva-based non-profit foundation best known for its annual meeting in Davos, Switzerland, which brings together top business leaders, international political leaders, selected intellectuals and journalists to discuss the most pressing issues facing the world, including health and the environment. (quoted from Wikipedia)

    I try not to dismiss any group that puts a large effort into "neutral" analysis. So the WEF releasing a report is worth looking at. I have included the most disturbing image in the report about the USA.

    Please see their report embedded below the image.

    One other disturbing message is "Global credit stock doubled from $57 trillion to $109 trillion in just 10 years (from 2000 to 2010), it will need to double again to an incredible $210 trillion by 2020 in order to provide the necessary credit-driven growth.".

    Whoo-ha. Thats a nice trajectory. Even if that does happen, can it be sustained? Anyway, read more if you have the time.

    Wednesday, January 19, 2011

    China ups the ante on systemic losses

    China, as it has been well documented on this blog, has been hyper-inflating it's economy by plowing money into real estate development. The unbelievable bubble they are building has resulted in entire cities being built without anyone living in them.

    China's own reports of economic data is alway suspect, and skewed to place it's financial situation in the best light possible. If China would only realize the best way to replace America as a world power ISN'T to act more reckless than the USA, but instead to act more trustworthy.

    Alas, lucky for me as an American citizen, China is proving that they are less responsible.
    It has been revealed that over 1.5 trillion dollars is estimated to be at risk by local Chinese governments who have mis-invested in the hyper real estate bubble. According to Chinese government law, local government is not suppose to engage in such speculation.

    But with China's great economic success, it is also accompanied by great excesses and mis-investment. One can only guess the spectacle that will start to unfold if China starts to realize 1.5 trillion in US dollar terms losses by local governments. Will China join in with the European Central bank in raw printing to fund local government losses?

    And if it does, it will be one hell of a deflationary collapse, or a currency collapse, it remains to be seen how this unfolds. I don't know why people bother reading suspense novels, just reading the world economic news provides more intrigue than any novel.

    Reality is the greatest form of entertainment.

    Thanks to Bob schulties for the link

    Tuesday, January 18, 2011

    Europe proves they are more reckless than USA

    The US dollar will keep enjoying some strength, as it proves itself to be not as bad as others. The Federal Reserve Bank has come close to raw printing of money. All money in the USA to-date has been created on the backs of selling US bonds. In effect, every dollar created has an interest rate attached to it, and therefore every dollar created creates a long term drag on US debt.

    However, this arrangement is considered a sounder approach than just simply creating money, with no marketplace to counter such actions. The bond market in effect is the counter to the US over-doing money creation, as rates will rise if perception is the US shouldn't be creating more dollars.

    The European Central Bank has decided it is OK for Ireland to simply create Euros, without going through the European union to do so. This is in direct violation of the European Union law, and will likely be the doom of the Euro if this opening volley continues unabated in the year to come.

    For currency is based upon faith that the currency itself will retain value. By allowing Ireland to circumvent the established process of the European Union itself to create money, they are showing wrecklessness beyond America.

    How far the Europeans have fallen, since 2008 when they criticized America for it's "quantitative easing" and other acts that are also a challenge to the US dollar valuation.

    It looks like the European union has just lowered the bar to the next level. If the Euro can withstand continued raw printing of currency without a crisis in the years to come, I'd expect more countries to follow.

    After all, raw printing of money vs money backed by bonds vs money back by gold vs money backed by sea-shells is all a construct. No one really knows the effect these actions will have on the Euro.

    One thing is for sure, it is an indicator that a full out European crisis is a brewing to allow these actions.

    I highly recommend reading Mish's summary by clicking here.

    I put this on my Financial Ground Zero events. Even if this isn't a direct American crisis act, it is an important moment in world currency.

    Notice that this event will get zero press in the mass media. It is amazing how when governments publicly violate their own laws, it doesn't even get a mention.

    Monday, January 17, 2011

    This Week in Charts

    I am back from a business trip. I had some time to make some seriously large posts, that I hope to publish this week. For now, lets look at the charts.
    Really, the charts don't show any problems at all with the market, except that it is over-stretched up. In reality, all the problems that existed since 2008 are still present, just hidden from view.

    However a closer look we find municipal bonds are tanking, just as the market his hitting new highs.

    And for this reason, a severe decline from here is definitely in the cards. Various bloggers I follow give technical reasons why a fall is pending. Please put stop loss orders in at some level to protect position gains.

    To the charts!
    From WebSufinMurfs FinancialBlog2

    Here we have the spoiler, muni's
    From WebSufinMurfs FinancialBlog2

    Monday, January 10, 2011

    High Risk Returns

    This week, I may not be able to post as frequently as I would like. If I can make time, I'll post "this week in charts".

    By now, I have to sound like chicken little, with caution message. There are some interesting times in 2011 ahead. Some highlights that I see are big drivers.

    • Resource prices have run up in 2010, but retail prices have not. This will cause margin compression on companies, affecting their profit reports.
    • The government election will bring some significant postering changes. I expect some blow-hard politics in Washington, but my prediction is they do nothing of substance to change the basics. Financial accounting that is dishonest (as per rules existing from 1940s to 2008) avoiding mark to market accounting. Also I doubt they actually reform the financial sector.
      But the proposed changes may cause market volatility.
    • As I already posted, there are proposals to change the futures market in an attempt to pull in resource prices. Actual change in rules, which I do believe will occur, will result in market shifting. I expect in this case the "inside" will know before we do if the will of the government exists to implement change. They will front run the announcement.
    • Europe's problems may be good for US dollar valuation, but can't be good for economic outlooks. Dislocations in bond markets for various countries will cause ripple effects.
    • Various US states and cities are now talking bankruptcy in 2011. Any one of these if it gains steam can cause municipal bond issues, which will ripple.
    • The market has had a FANTASTIC run from 2009, from SPX 666 to a high of 1276.83, almost 92% market gain in 22 months. Pretty freaking great. We could see 150% gains from bottom to top. But it does smell toppish. However, I have sang this song before. :)
    • The US 30 year bond yield is dancing at the higher end, right now about 4.5%, a break above 5% would cause issues.
    • China is deliberately popping their own bubble, due to outrageous inflation issues. China now being the #2 economy in the world, deliberately slowing their economy is likely to have ripple effects.

    The market could really go a bit higher before turning. I am done with trying to catch tops or bottoms. But it is safe to say, that banking on an extended market run higher, is getting a little long in the tooth.

    I am net long in resources. In financial companies some very minor shorts, another great sign that a fall is approaching. :)

    Good luck.

    Sunday, January 9, 2011

    Volcker Steps down from White House Panel

    Paul Volcker is the last Federal Reserve Board Chairman I believe acted responsibly in his position. He has been a voice of reason in an insane financial world.

    Mr. Volcker leaving the white house is a knock against hope of the right thing being done.

    I hope he chooses to continue to voice his opinion publicly, and speaking out when appropriate. However I suspect we will hear less from Mr. Volcker now that he is leaving the white house, out of respect for the government.

    The US is the world reserve currency, and therefore Mr. Volcker's departure is a loss not only for America, but for the world. Speculation of his replacement are Yale University's Richard Levin and Jim Owens, who retired in October as chairman of Caterpillar Inc..
    With all due respect to both men, Volcker's proven banking leadership, breadth and depth of experience are a far cry from Mr. Volcker. I hope they can prove they are up to the task of filling his shoes.

    Friday, January 7, 2011

    Food Prices hit record high

    What a way to start the year. Already sounding the alarm that food prices are rising, and will continue to rise. Looks like this 2011 prediction is already on track.

    And what people are mis-understanding this isn't due to money printing, inflation, deflation, or speculators as the CTFC want you to believe.

    The cause is what I predicted back in December of 2008, and we will see for the rest of our lives. Continued rise in food and energy costs as China and India economies grow. Click to read my December 2008 full article.

    Once again, why I recommend food, energy, and resources as investments.