Marc Faber on Fiat Currencies

Rebound Thursday

As expected in previous post, a sharp rebound happened Thursday. Thursday AM I bought some gold miners as a hedge if the rally continues. This could be a one day wonder and the selloff continue. who knows. My gold miner play is not for the long haul, but for a multi-day bounce. I'll be quick to get out if we return back to the lows of Wednesday.

From WebSufinMurfs FinancialBlog2

Bear Market Started?

The S & P 500 and NASDAQ are indicating the Bear market has resumed. The Dow Jones Industrial Average has not yet broken the bull trend line. The US Dollar is rising, and Gold is falling.

So why haven't I put a very large bear picture on today's post? From a chartist perspective, the DJIA needs to confirm to call this the return of the Bear Market. Right now, this is just called "a correction".

Thursday is the US GDP number released, and we can easily see a sharp rebound based off of that number. I fully expect a bounce back between now and Monday. I covered many of my shorts today, looking to re-add to my shorts with SPX above 1060, possibly as high as 1100.

Below are the various charts of the market indicators.

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

Short News roundup

McDonald's Skinner says customers in 'retreat mode'
McDonalds leaving Iceland because of currency collapse - My Spin - If the US does the same thing, wonder if they will stay....
GMAC Asks for Fresh Lifeline - My spin - I want 3 Billion or I'll declare bankruptcy
Apollo Group says SEC starts probe, 4Q profit down - My Spin - I am shocked the University of Phoenix owner may have financial irregularities. Online university degrees represent highest integrity of education.
Citibank rumored to offer clients huge discounts to pay part of their balance(43%) (zerohedge blog)
Russian Banks Count Pigs, Lingerie as Collateral - My Spin - Maybe its time I deposit my savings into a russian bank, I trust a pigs value over CDO and MBS. ;)
Edward Pinto: The Government's Loan Modification Numbers Are A Total Sham - My Spin - Translation more mortgage failures to come, housing prices to fall.
Freddie Mac Annualized Defaults Hit Record High At 7.3%
Mortgage loan application volume, decreased 12.3 percent

Bear Market Indicator

The market rose 65% from SPX 666 to high SPX 1101 on 10/19/09. The moment the market breaks the bull trend line, it is quite possible the market runs for the door. Don't be greedy, if the market breaks the bull trend line, STEP ASIDE IMMEDIATELY.

Today, US Dollar getting stronger, gold getting weaker. China's equivalent of Google, Baidu dumped from 440 to 380 after hours. As I have blogged, I don't think China can save the world yet, and once the greater world realizes this, it won't be pretty.

So another set of charts for your preview. I am once again, loaded up on lottery tickets, SRS, FAZ, TZA, DXD, as well as short a variety of stocks. The market could very well skip up and down to mid November before breaking the two major trend lines.

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

Comparing trends 1929 vs 2009

Today I posted some 2009 graphs for week of 10.25.09, then I got to thinking, what if I took the graph from 1929 I posted on Thursday and added trend lines to see what I got.

Well, it isn't pretty. If the 1929 "trend lines" somehow repeat in 2009-2010, the market has quite a bit more umph in it to the upside. Warning, today we are not on the gold standard, fiat currencies, plus micro-second response time to markets. So drawing exact parallels is dangerous. But it does give pause for me about when this market will roll over.

But NOTE: From a percent re-tracement, we have already exceeded the rebound in 1929-1930, 65% vs 52%. From this perspective we are over-due for a market retreat, so its anyone's guess.

1929-1930

From WebSufinMurfs FinancialBlog2

2008-2009

From WebSurfinMurf's Financial Blog

Market Snapshot for week of 10.25.09

Today, I have a bunch of charts, just for perspective on the market.
I was originally thinking market turns any day, now I am thinking could be closer to middle November. Pictures tell the story most of all. And the key indicator, like we have seen since March, is the USD valuation.

From WebSurfinMurf's Financial Blog

From WebSurfinMurf's Financial Blog

From WebSurfinMurf's Financial Blog

From WebSurfinMurf's Financial Blog

From WebSurfinMurf's Financial Blog

From WebSurfinMurf's Financial Blog

New Global Government under climate control

This isn't a financial video, but it does affect the countries financial and freedom for the rest of our lives. The day this treaty is passed, it will be another ground zero moment. (Once again, thanks swan for video link)

1929 vs 2009

I wrote this post on Tuesday for Wednesday night release. On Wednesday the markets took a bit of a dive. I am NOT saying the markets will collapse like the great depression. But I am trying to show the extreme market moves should not be taken as a sign of strength. In the Great Depression we had massive moves, and history has shown that wasn't a good thing.

Here are key percent statistics "as of" today's high:


A picture with some comparisons. I had to piece together two images to show 1929-1930.
Images taken from The Chart Store. (Recommended site)

From WebSurfinMurf's Financial Blog

Goldman Sachs

Quote from bloomberg article, a must read:

Oct. 21 (Bloomberg) -- A Goldman Sachs International adviser defended compensation in the finance industry as his company plans a near-record year for pay, saying the spending will help boost the economy.

“We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all,” Brian Griffiths, who was a special adviser to former British Prime Minister Margaret Thatcher, said yesterday at a panel discussion hosted by St. Paul’s Cathedral in London. The panel’s discussion topic was, “What is the price of morality in the marketplace?”

Goldman Sachs Group Inc., based in New York, set aside $16.7 billion for compensation and benefits in the first nine months of 2009, up 46 percent from a year earlier and enough to pay each worker $527,192 for the period. The amount set aside this year is just shy of the all-time high $16.9 billion allocated in the first three quarters of 2007. Goldman Sachs spokesman Michael DuVally in New York declined to comment.

Couple that with this article:

“The influence of money and lobbies on Washington has reached a shameful level,” Paul Volcker, chairman of the newly formed Economic Recovery Advisory Board, told the financial daily Il Sole 24 Ore. “Not to mention the fact that, since many Treasury nominees have not been confirmed by Congress, Geithner is surrounded by private advisors. Eight months into the new administration, the Treasury does not yet have a staff of [its own] officials. And this raises the question of using informal advisors who come from Wall Street. It should not happen.”

It’s not just Geithner’s aides that have ties to Wall Street, either. The Treasury Secretary’s phone records show he had at least 80 conversations with top financial figures since January 28. That includes 10 discussions with JPMorgan Chase & Co.’s (NYSE: JPM) Jamie Dimon and 22 with Goldman Sachs Chief Lloyd Blankfein. Blackrock boss Larry Fink and Citigroup luminaries Dick Parsons and Vikrim Pandit also ranked high on Geithner’s call registry.

Goldman Sachs Group Inc. paid another advisor to Geithner, Gene Sperling, $887,727 for advice on its charitable giving, and fulltime lobbyist Mark Patterson $637,492, according to Bloomberg.

Shadow market trading (dark pools)
Dark pools, the largest of which are run by banks such as Goldman Sachs and Credit Suisse, account for an estimated 10 to 15 percent of overall U.S. equity volume.

Summary
Goldman Sachs reminds me of an parasite. (or great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money) To say that America and the world shouldn't question outrageous bonuses coupled with the behavior of Front Running orders (illegal), undo influence in the government, and selling MBS knowing they where worthless, well, thats some brass balls.

And like any parasite, it SHOULD continue to suck from the host, until the host decides it has had enough. And right now, America is indifferent from the parasites sucking it dry.

John Chinnock Quote

In reviewing some older material, I ran across this post from July by my friend John Chinnock.

An interesting quote from John below.
Short-term forecasting is not my specialty, but I will make some amateur attempts. We broke out of a huge consolidation on Thursday. Despite the market being very overbought, I see it as very crucial for the market to quickly give back this breakout early next week. As the risk of looking foolish over the short-term (which short-term forecasters usually wind up doing), I see next week as crucial for the near-term bearish case. If we continue to consolidate above the breakout zone (approximately Dow 8900 and SPX 855), we could easily have another large leg higher. I personally will be forced to at least lighten, as once the bulls begin to stampede, logic quickly transforms into euphoria, and rallies can last much longer than expected (do the bulls ever even use logic?). My fear isn't that the market won't eventually fail, it's that we'll go above Dow 10K+ before it does. At some point, as traders, we realize that it is better to make and/or save money than be right.

Interesting forecasting, John's fears came true. The question is, when, not if, will the market correct?

How greedy can you get

The market soared to new highs today, SPX hitting 1,100, and impressive 65% off of the market lows just in March!

Keep in mind, the market from its high in October 2007 down to the low in March 2009 was 58%. That decline took 13 months. The counter rally from March 2009 to today was 7 months.

If you are long, congrats great job. But pick a level, any level, say, SPX 999 or lower, and ensure you hit out the longs (at least partially) when this market starts to retreat. At this point, SPX could hit 1,200 before 1000, the market has been on an epic tear.

To put this in perspective, in 1972, SPX was valued at around 110, in 1985, the market hit spx 181, up 65% in 13 YEARS!! Another nifty stat for all the buy & hold for decades. If you bought in the market back in 1996 at SPX 666, it took (with roller coaster ride much higher and lower between) 13 years to get to the current valuation.

Both stats DO NOT include inflation, adjusted for inflation, the gains took much longer than 13 years to attain. No matter how you look at it, only very greedy people take nothing off the table after gaining 65% in 7 months. Keep in mind, bank interest rates is what..1%?

This is NOT A BULL MARKET. This is a market that was pumped with free money, fundamentals have not changed.

But then again, I have been very wrong since SPX 930. One positive for the market to keep rallying is the US dollar keeps collapsing. The more the dollar collapses, the more the market rallies, until the day a devalued dollar causes fear. Remember, if the US dollar ever does a true collapse (not a bleed lower) the US government in effect is insolvent and must close shop. This happened in Iceland, and many other governments. I am not suggesting that will happen to the US, just pointing out how high the stakes are if the USD becomes so low, that panic strikes.

The market is no longer for investing, its a casino. Be sure to leave the table with chips in your pocket.

From WebSurfinMurf's Financial Blog

Economic and Monetary Inflation and Deflation

Continuing from my monetary post series starting with "What is Money" and "Creating Money and Credit"

Before May 1st, 1933, Inflation and Deflation was viewed in terms of economy AND currency valuation as both tied together. However, since the world moved to Fiat currencies, it is a mistake to continue to link an Economic deflation with currency valuation. In general, there is pressure that still exists on currency valuation with the economy, as well as interest rates.

But without currencies tied to valuation of a "limited resource" such as gold, the ability to create money at will has seperated economic valuation from monetary. With that said, lets focus on the definition of Economic Inflation and Deflation.

Economic Inflation (Expansion)
I am starting with inflation, since most people have an easier time grasping the concept of Economic inflation. When an economic system is expanding at such a rate that it creates rising resource costs as businesses and consumers "complete" to buy the resources. For example, in India you could say that the extraordinary economic growth the country has experienced since the late 90's was an "economic expansion". But some resources exploded with higher costs as that country competed for key resources for the business and economic growth. Salaries rose dramatically for skilled workers in key fields, such as software development. Prices rose, at times perhaps too quickly, for real estate in growth cities. Credit is over-extended. Credit maybe cheap or expensive, depending on monetary inflation, and the sources of the economic expansion.

Sometimes Economic inflation may be based upon artificial supply and demand, such as the USA. With loose monetary policies, the USA pulled itself out of a recession in 2002 with a growing economy, where real estate costs exploded, as well as compensation for financial corporations. During this time, the US dollar also lost value, but costs for basic resources did not rise substantially. However this I consider "Monetary Inflation", described in section below. The money supply increased driving artificial valuations from loose monetary practices. Economic and monetary changes are linked, however in this case the government made money very cheap, in effect watering down US dollars to artificially create economic expansion. During times of economic inflation, you may see companies become over-valued.

Typically with rising asset prices, and wages, people put money into higher risk investments, this usually leads to monetary inflation and currency valuations going lower.

When economies over-expand, or do so through fraud, then economic deflation follows.

Economic Deflation (Contraction)
When an economic system, say the USA, sees it's economy contract, assets become cheaper, and labor experiences pressures to have lower wages and benefits. Typically credit also is reigned in, with lenders being more careful who they lend to.

Economic contractions are CRITICAL to ensuring a robust economy. A correction is required when the economy gets ahead of itself, and a "cleansing" of over-extended companies must occur to provide fertile conditions for a sustained return to an economic expansion.

Typically with falling asset prices, and wages, people put money into lower risk investments, this usually leads to monetary deflation and currency valuations going higher.

Monetary Inflation (expanding money supply)
Money is a resource, just like food, gold, real estate, etc. If money is too easy to acquire, then the value of the currency goes lower compared to "harder to get" currencies. For example, for 100's of years the British pound had a very strong valuation, due to numerous factors. One critical factor (except last 10+ years) was Britain maintained monetary policies that ensured the pound was "harder to get" than other currencies. This could have been through higher interest rates, or bank lending/credit creation as compared with other nations.

Monetary Deflation (contraction money supply)
If money is hard to acquire, then the value of the currency goes higher compared to "easier to get" currencies. For example, since about 2001, America has pursued aggressively artificially low interest rates and easy to get credit/money. At the height of the real estate market, anyone could get 600,000 dollar loan with NO JOB. All that was required was for you to lie on the application, the lender did not even ask for proof of what you wrote.

Ability for such easy acquisition of money devalued the US dollar (inflation). Since 2008, American financial institutions are pulling back on credit, like demanding proof of a job before lending money. As money supply contracts, compared to other currencies, the currency becomes more valuable.

In essence, when money is a scare resource, it can buy more goods/services, for lower prices.

Economic VS Monetary Inflation/Deflation
The reason I separated the definition Economic vs Monetary Inflation/Deflation is that when you listen to an "inflationist" or "deflationist", each focuses on different aspects of financial pressures to define "inflation" or "deflation".

Most Inflationists focus on currency valuations, and not the economy. Their primary focus is the value of the dollar, and where they should invest money to ensure they can retain purchasing power.

Most deflationists focus on the economy, and the overall pressures of the marketplace. They tend to see that monetary deflation is "locked" with the economy, where most inflationists do not.

Mish(Video), Robert Precter, and blogger Karl I view as Economic Deflationists, typically tying currency valuations more closely to the economic activity.

Mark Faber(Video), Peter Schiff (Video), Daniel R. Amerman, and Jim Rogers I view as Monetary Inflationists, where they are less concerned about the economy, and more concerned over US dollar valuations.

Harry Dent is a cross between both. To me he is an economic deflationist based upon demographics, but an inflationists based upon monetary policy. Mr. Dent believes the economic deflation should overcome the monetary inflation cycles over a longer period of time compared to other deflationists I have read about.

Gold
Both inflationists and deflationists may like purchasing resources, such as gold, as a hedge against currency fluctuation.

Summary of terms according to MY definition

1. Monetary Inflation / Deflation refer to valuation of currencies compared to each other and natural resources
   
2. Economic Inflation / Deflation refer to the expansion and contraction of the economy, and valuation of assets in the economy (wages, prices for services, employment, etc)
   
3. Gold or other natural resources may be favored by either camp for currency hedging to secure wealth.

Next up is Misrepresenting Economic and Financial Data.

Foreclosure court ruling against banks

In Massachusetts court ruling, banks in their rush to give money to people, didn't properly document who owns the home. This puts into question who owns the home.

Federal Reserve Bank Conspiracy

Friday I posted a blog post on creation of money and credit. I don't believe in conspiracies (for the most part). But rather like people acting in concert for their best interests.

Meaning, it isn't nefarious, people always do whats best for them, even at the detriment to everyone else. So in this case, big money set up a system that ensures they always win. The Government of the people, the USA, is really under the thumb of the banks.

This snippet if from a previous movie post I made, but just the Federal Reserve Conspiracy part. Enjoy ..... with some temperament.

Food for thought

Be sure to read my previous post for Friday. Just a quick chart, today or Monday may get messy. Below are major trend lines.

From WebSurfinMurf's Financial Blog

Creating Money & Credit

As a follow up to "What is Money?", it was established that having a central authority to issue new money is required, to minimize fraud. Notice, I didn't say eliminate fraud, since, the power is in the money printer.

In a closed system, how does money get back into the system? It is unfortunately complex system. I'll explain it in simple terms, then layer on the added complexity. Like most things in life, the detail is where the danger lies.

It is important to understand that almost all of this only applies to FIAT Currencies. Fiat currencies backed by nothing, just a promise "it has value". A Non-Fiat currency is backed by a hard asset, such as gold. Almost all currencies after the 30's is FIAT currencies.

Bonds - Step 1 (IDEAL MODEL)
Simply put, the US government issues bonds, which are debt notes with interest, with term duration, that are sold to generate money. When I say sold, there is really two different ways of selling bonds.

Primarily, bonds are sold on the open market, just like a stock. The amount of demand for bonds dictate interest rate levels. High demand for bonds equals low interest rates. When people dont want a bond (like junk bonds), they demand high interest rate to be compensated for the "undesirable" investment.

Alternately, the government may sell bonds .... to itself. A great example is "social security". A division of the government collects social security money, and "invests" it to eventually pay for everyone's retirement. In my opinion, Social Security should have been diversified into natural resources, other countries bonds, etc. But instead, the US government primarily sold to the Social Security administration US Bonds for the cash.

Printing Cash - Step 2 (IDEAL MODEL)
Basically, when the government gives an IOU (a bond), the proceeds is money that can be spent by the government.

In reality, (from Wikipedia) New dollars are issued when the Federal Reserve elects to fund the purchase of debt, primarily U.S. Treasury Bonds, by creating new reserves rather than financing the purchase with existing reserves. When the bond issuer spends the money, new dollars enter circulation.

Which is basically saying that new dollars are created when the Federal Reserve Bank purchases bonds from the US Government. So, in a nutshell, new money has interest that gets paid to a private institution. The banking system sits above all the taxpayers.
This is very complex as to why and who benefits. You can find tons of tin foil hat information. Lets just go with ideal model, and ignore the details of reality for this blog post. Who owns what and who profits is politics. The point of this isn't to go into tin foil hat land, but to explore "money & credit".

Expanding Money Supply - Step 3 - Fractional Reserve Lending (IDEAL MODEL)

Step 1 and 2, without fractional reserve lending would not lead to an increase in money supply. US dollars would circulate, but the number of dollars in existence would be finite. A crucial role in monetary expansion is fractional reserve lending.

Basic Lending (no fractional reserve policy)
Without fractional reserve rules, if I wanted to lend someone money, I would need to physically have 100% of the cash that I can lend out. It doesn't have to be hard cash, could be bonds, could be bank account wiring. The amount of money I could led out is at maximum, the amount of money I own.

Fractional Reserve Lending
A bank may own 100 million dollars, but with Fractional reserve lending (wikipedia) , the bank could give credit to someone, say for 100 million dollars to a corporation. But instead of giving the asset (bond, cash etc), the bank issues a "Credit" for 100 million dollars, and EARMARKS part of the 100 million dollars to be held as collateral for the loan, say 20%. It now has 80 million more dollars to lend out. The process repeats, lends out 80 million, keeping 16 million on hand, etc. By the time your done the bank turns 100 million into 357 million + the original 100 million (reserve) for a total of 457 million!

Assuming all the loans is at 5%, the bank pays the depositor 5 million a year, but pulls in 17.85 million. Not so bad!

Feed back loop- Step 4
Some of the extra money generated by Fractional Reserve lending is goes back to step 1. Therefore we have a net increase in new dollars with issuance of debt notes. This therefore requires new physical cash to be printed for the "extra money" created.


Is Fractional Reserve Lending bad?
If we go back to the definition of money, the idea is to capture work done with an IOU. Money maintains value if all work done is paid back with the debt note taken in compensation. So if responsible lending is done, and money paid for services is paid back, the system is reasonably sound.

Significant problems arise when money is lent "overpaying" for work, or the money lent cannot be paid back.

So if the bank lending is sound, and conservative, Fractional Reserve Lending isn't evil. Unfortunately, such power is abused and therefore FIAT currencies that can be printed to pay debts, combined with loose terms for making loans, that can never be paid back, break the system. Therefore in my opinion, fiat currency systems should have tighter reserves, say 50%. If the Federal Reserve required say, 0.01% to be held, you could see how credit would explode.

This is why people afraid of central authorities prefer gold backed currencies. The money creator can't over-create credit/money since the currency can always be paid back. In my opinion, gold backed currencies are severely flawed also. However their only advantage is it prevents loose printing presses. Main problem with gold backed money is you cant capture "work done" without digging a hole, pulling a shiny rock out, put it in a vault, (or make coins) then print a piece of paper to use for capturing value of work. Digging shiny rocks out the ground have no relation at all to capturing work. But it does ensure the piece of paper always has value and cannot be abused into hyper inflation. (devaluation of paper money)

Summary

1. Fractional Reserve lending allows credit (money) to be created out of thin air. Responsible lending and reserves for lending are required to prevent problems with the currency.
2. All new money is created through bonds, which are IOU's with interest. The Federal Reserve Bank purchases US Treasuries to create new physical cash.
3. Credit and money are the same thing. Its an IOU for work done.

Next up, Ideal form of money - Power to the People


*** PLEASE add comments below for any corrections to my view ***

Friday, time to short?

I may go all in for shorting the market Friday, to the hilt. I will keep my small Gold mining positions

I will cover the shorts Monday if wrong. I am hoping Friday opens and rallies all day into the close, hopefully SPX hits close to 1,120 Friday, on the charts that will complete the bull from charting perspective. The market is so overbought, the risk of the market going up 15% from here vs 40% lower is good.

IBM reported disappointing earnings after Thursday. Bank of America reports Friday AM. I wouldn't be surprised of Bank of America last minute delays announcement until EOD Friday.

A GREAT article from Slope of Hope comparing this bull run to the last great depression. Keep in mind past experience does not gaurantee future results. :)

Comments on market

The sky is the limit for the market, until the USD comes into crisis mode. I expect market rally straight into Saturday, SPX 1120 is last resistance level. A break above that, needs rethinking of what the heck I am thinking.

But in general, a few items. NOTHING has been corrected, all the financial problems still exist. All that has changed is two things.
1) Government printing trillions of dollars to fund banks
2) Government changed the laws to not require banks to value assets according to what they sell at. Banks can value assets as they see fit.

For example, 3rd quarter foreclosures on homes jump 23% in Q3. One out of every 136 U.S. households received a filing. A “shadow inventory” of 7 million properties are in the foreclosure process!

So, this market can run for a bit, if past Monday it's time I go all cash and hang up my hat for a while.

One troubling sign (from Karl's pay video) is the Municipal fund market is having issues. In a soaring market, one wouldn't expect this.

Below the IQI chart, is USD chart. Dollar is entering dangerous area. I am starting to think the government will let the dollar hit 69 before acting. If so, the market may go much higher in the mean time.

From WebSurfinMurf's Financial Blog

From WebSurfinMurf's Financial Blog

What is Money?

I have been listening to a podcast on inflation / deflation, which I have not yet finished. This series has inspired me to build a set of financial concepts & definitions.

Most people don't really think truly what money is. To me, money is a tool, like a hammer or a shoe. It is crucial to understand what the true nature of money is, to better understand the risks we face today.

I will start with money in an IDEAL STATE.

Say we have a farmer and a shoemaker. The farmer can only produce food during spring/summer. While the shoemaker can make shoes year round. Neither can survive without the other. To survive each would be required to do all work themselves to be self sufficient.

The farmer may give 3 bushels of corn for one set of shoes for himself to the shoemaker. The farmer knows he may need shoes in winter, for his children, but may not be able to store food for such expenses. (Lets ignore that farmers turn food into "storable" food, such as smoking, jarring, etc.)

The farmer could give food to the shoemaker, and the shoemaker give back a DEBT NOTE worth X amount of shoes to the farmer. This works for both parties, the farmer has "stored wealth" in the form of a debt note from the shoemaker that allows the farmer to acquire shoes at any time. The shoemaker is given goods (WORK DONE), he has the output of work, with the promise of "someday" paying back the work.

Read the paragraph above, this is crucial to understand money. Without money, people would need to barter good/services and maintain debt notes with each other.

Say the farmer, needs a doctor in the winter, the doctor may accept the debt note for shoes from the shoemaker as payment, and 1 bushel of corn. The doctor performs a service (WORK), and receives payment (FUTURE WORK) from the farmer, payable by the shoemaker plus 1 debt note for 1 bushel of corn (FUTURE WORK) from the farmer.

If society ran on a barter system, you can clearly see how quickly this would become confusing. If payment in goods are not fully available at the time, debt notes would be needed. Even if payment is available, in the example above the doctor may not want a pair of shoes and 1 bushels of corn. The doctor would need to accept that payment and seek someone who wants these items to barter for what the doctor needs.

Any debt notes would be required to be paid by the issuer of the note. The doctor couldn't get shoes from any shoemaker, only from the shoemaker issuing the debt note.

Further, the doctor has no direct knowledge the shoemaker debt note is real, and not a forgery.

If all people in this example could use a standard for debt notes, aka money, each can assign proper value for work done to work owed.
Example:
3 bushels of corn = 1 pair of shoes
1 doctor visit = 1 pair of shoes + 1 bushel of corn
1 bushel of corn = 10 dollars.
Therefore:
shoes = 30 dollars
1 doctor visit = 40 dollars.

In an ideal world, you could take the example above, and the shoemaker would actually create 30 hand-written dollars to give to the farmer. The farmer would give the 30 dollars from the shoemaker, and hand write 10 more dollars to give a total of 40 to the doctor.

The people receiving the money created to "capture" the work done, could spend the money for any good/services they seem fit. The people who wrote the money would eventually pay back the work done in services when someone comes to them for services.

In an "honor system" people could just create money for services done PROVIDING they produce equal to or more than in work in their trade, therefore paying back the debt they generated.

There are obvious flaws to using money "created by anyone". The immediate obvious issue is people creating money but not doing any work to compensate for the work they received.
Also, the money itself would be not uniform, and impossible to account for any "fake money" generated. Also people would tend to over-value their work very differently from each other. There would not be uniformity of value for work done.

To overcome many of these problems, money is controlled by a central authority, one that creates money at a pace equal to the work being generated. Money is standardized in look, ensuring minimal fraud. Therefore money is a tightly (we hope) controlled TOOL, a way of standardizing work done to work owed. Once money is "in the system", it works uniformly across all work/services.

Summary

1. Money is given for work done. The essence of money, it is an "IOU"
2. Money retains value, based on it is a reliable universally exchangeable medium for future work. (Low fraud, everyone accepts for work)
3. Money in its ideal state, is "created" for work done today, and is redeemed for "future work" as a payback by the person who originally received the work. (closed system, zero inflation)

In my next post, I'll cover Creating Money & Credit how this captures "work done".

Market movements

Until the market breaks out of the range I posted in "Key levels to watch", I will post a series on inflation/deflation and various definitions, to culminate/articulate final position on the topics.

Intel earnings are good news, their gross margins are up. This should rocket the markets higher. SPX 1120 is target, as mentioned earlier. If we end on a high note Friday, keep in mind it's option expiration week.

This may be the final parabolic blowoff, who knows what level that will be. The blow-off may end once the market gets concerned over the dollar breaking into new lows.

Blog Pictures

Images lifted from various blogs, with links back to the full story. I find this format great for generating interest in various financial topics. The take away should be this is not a normal recession. I believe history will revise this period as a depression.

Mish on "Can We Really Trust The Leading Economic Indicators?", below is image of Bank Credit expansion (or contraction) year over year.

From WebSurfinMurf's Financial Blog

Chris Puplava on Financial Sense has an article "Fool Me Once, Shame on You. Fool Me Twice, Shame on Me", shows how "leading economic indicators" are being DWARFED (if not outright manipulated) by The Federal Reserve & US Treasury monetary policies. This is NOT normal folks, and it a distortion of reality.

From WebSurfinMurf's Financial Blog

Mish in his article Overly Optimistic Consensus Plays Greater Fools' Game Once Again quotes David Rosenberg in Report: A “V”-Shaped Recovery.
While we will not belabour the point, when all the write-downs are included, the trailing P/E on “reported” earnings just widened to its highest levels in recorded history of nearly 140x, which is three times the levels prevailing during the height of the tech bubble.
S&P 500 corporate earnings multiplier vs S&P 500 valuation, INCLUDING write-downs

From WebSurfinMurf's Financial Blog

Key Levels to Watch

This market is prime for a major correction, but then again, I believe I said that back in July.
So that makes the market even MORE prime for a correction, right? :)

In any event, enough with the ping-pong range games.
Here are some lines in the sand to take notice.

If the SPX breaks above 1080, on a closing basis, that makes me take notice. Today we hit 1079.xx multiple times, but could not hit 1080. Above 1100 makes me question if I need to reconsider my whole view. SPX below the bull trend line means to me "The Bear Market is back", and watch out for the bite.

From WebSurfinMurf's Financial Blog

USD breaking below 72 is extremely alarming, and below 70, well, bunker down for some life changing events. USD goes on/above 78 makes me thing the USD bottom is in, and the market is ready to collapse.

The 10 year (TNX) interest rates broke below previous bull trend line (which is good for America's debt machine). Looking for rates to break back above bull trend or below green line in graph below.

From WebSurfinMurf's Financial Blog

Gold is kinda a wild card, the events above in either direction may support Gold. Monday I bought a LITTLE of the gold miners I once sold. Not too much since I think gold miners will pull back hard, but so far I have been so wrong, best to have a hedge.

Options Expiration Week

This week should have games, Friday close marks yet another options expiration. I could EASILY see the market skyrocket into Friday. If it does, and you held since SPX 666, consider taking some off the table. Options expiration often is where games in the market unfold.

Below are the levels watching, S & P 500 (SPX) is trading above the bull trend line, and below the recent highs, a break above SPX 1080 should bring the final, terminal blowoff. But who knows? Perhaps the market trends down from here.

The US dollar is showing MILD strengthening, with a bottom on Thursday.

Some news:
Latvia avoids financial collapse, with 11 billion given to Latvia by IMF, EU, and Sweden. - My Spin - ..that may delay collapse until 2010.

U.S. banks are reducing their lending at the fastest rate on record, tightening the credit squeeze and threatening to leave many otherwise viable businesses unable to borrow money to expand their businesses, meet their payroll or refinance their maturing debts.
My Spin - Is this a sign of a recovering economy......Bank credit contracting fastest on record?

From WebSurfinMurf's Financial Blog

From WebSurfinMurf's Financial Blog

Ben Bernanke is consistently wrong

Ben Bernanke has gotten EVERY major step wrong in the last 8 years.
That is why now I 100% trust him to make everything right, he is due! ;)

Karl of market ticker (click for article/videos) criticizes Bernanke MAJOR boldface lies. Mr. Bernanke is engaging in banana republic outright monetizing the USD. (photocopy cash...) Karl, hate to to tell ya, America doesn't care what happens, just as long as today things look better. Who cares about next year?



Music video dedicated to Ben

US Dollar, Market Valuation

UPDATE: 10/9/09 @ 9:30 Am eastern: Apparently Mr. Bernanke read my blog and is starting to take action, first with just words of "tightening policy". I remain a skeptic until action is taken.

The USD trended down today, making a new low for 2009, spiking towards the end of the day higher.

At this point, no one is investing in company valuation, the entire market is directly moving to the US dollar rising or falling. A slow bleed has been yielding a rise in the market.

Once the dollar breaks into the yellow zone I posted yesterday with conviction, gold should explode higher, and the equity markets may start to swoon.

The problem is, if the dollar goes below 70, now the country is under pressure for a possible US currency collapse. And in that territory, the government may not beable to stop it, since the US Dollar is valued by other currencies trading with it.


The Federal Reserve knows a dollar collapse will help no one, and the markets will start to fall, not rise, in response to a challenge to the currency valuation.

I believe (but cannot be certain) that when the time comes Ben Bernanke will fold his bluff hand and do something to firm up the dollar, like raise interest rates. I have a problem believing Ben will do this, since his life's thesis will at that moment be proven to be a failure. He could not print the US into prosperity, and he brought the US to the brink of collapse.

Mr. Bernanke isn't stupid, but like all men, he has an ego. Let's hope his brain overcomes his ego and he defend the dollar in the final hour.

The fact the country is near such a perilous position, but the media has failed us, the "system" has failed us, is disturbing to say the least. The moral to story, individuals cannot be trusted, the system must rely on open market CAPITALISM trading. The Federal Reserve Bank is an abomination, and no one should yield the power that they do.

Alternately, an event will be announced to scare markets lower, to once again scare people into bonds, a trick that continues to work to reinforce the dollar. But that trick will grow old, and may not work someday.

Obsession on current market level

Thursday should bring a decisive resolution to market direction for near-term. Assuming USD breaks below current levels, dollar entering danger zone, and alarm bells will go off if hits below 70.

From WebSurfinMurf's Financial Blog

From WebSurfinMurf's Financial Blog

TrendLine Crazy 2, US Dollar Danger

Tuesday mornings post had a bunch of lines for me trying to over-analyze the stock charts. Well today the market hit under the blue and green trend lines I drew. The green trend line I drew this AM was a little too steep, I adjusted slightly up to be in line with all the recent highs.

The REAL story is the USD is under great pressure, and continues to fall. As mentioned previously, this is a great trick, until the USD cracks below 70, then the dollar is under threat of collapsing. In my graph below on USD long view, the yellow area shows the area of danger. At this point I EXPECT the dollar to penetrate the area, Gold to make new highs, THEN USD to reverse. I could also see the USD going down to 70 causing a parabolic blowoff in the US stock markets like never seen before.

NOTE: Calls for US Dollar end as dominating currency being called as beginning from China issuing bonds for the first time ever. I am a disbeliever for now.

So really its watch the dollar, gold, and the markets, and sit in cash, unless ur insane like me and like to play in minefields.

From WebSurfinMurf's Financial Blog

US Dollar is edging down .... again...

From WebSurfinMurf's Financial Blog

From WebSurfinMurf's Financial Blog

From WebSurfinMurf's Financial Blog

Tendline Crazy

I am at a loss for the market direction. After such a huge rally I am still inclined to believe we are in for a major downturn. But so far, there doesn't seem to be a catalyst for that outcome.

So like any trader, you turn to the charts to try to palm read, hoping voodoo will tell you something.

See below me going a little trend line trading, maybe you can see the outcome.

One VERY ominous sign is the market volume is down, but prices are up. That can't last forever.
Slope of Hope has a VERY timely post, a topic I talked to my friend John Chinnock last night about. How far can printing money take us, and what will be the result? Slope's answer is the truth will materialize.

From WebSurfinMurf's Financial Blog

Market Bull to resume?

The market could go materially higher. I am starting to have my doubts of any sort of market crash to occur in the next 6 months. That doesn't mean the market will hit new highs.

Best place is cash, perhaps until 2010.

I may go 100% cash, and set some thresholds on various items, to bet when we cross or touch the critical chart points. The government may have inflated enough cash to hold up the financial markets for a while.

One good argument for a good sell off is many stocks are up so high, many approaching levels from August 2008, that its time to get back to sane valuation levels. Another, but seemingly meaningless argument, is the economy is in shambles, and no where close to as healthy as July 2008. But really, does reality matter in the stock market?

From WebSurfinMurf's Financial Blog

Market Movement Monday

Thursday and Friday where interesting, I covered a bunch of shorts I put on Friday September 25th. The market is behaving differently than the last 6 months.

First off, the USD broke below the short-lived bull trend line, and the market also went down. For the last 6 months, when the dollar lost value, the market rallied, but not this time.
Further, the markets went down AND US 10 year treasury yields went down.
And finally, gold kinda treaded water.


The market is yet once again on the brink of a decline. It could be a stampede after 62%+ up in under 6 months. The Federal Reserve bank stopped it's Quantitative Easing (buying US treasuries), and now the market is faltering.

I am trying to hold on the sidelines, but willing to jump in short again if SPX hits 1050-1060, or if the whole market starts to seem to come apart.

US Treasury yields going lower indicates fear, and a flight to saftey. if you have been long since SPX 666, I still advise to dump a portion to protect the returns.
Here are the charts:

From WebSurfinMurf's Financial Blog

From WebSurfinMurf's Financial Blog

From WebSurfinMurf's Financial Blog

Below is the TNX, US 10 year treasury yields. Notice how quick the market flees to bonds as soon as the market shows any weakness.

From WebSurfinMurf's Financial Blog

Inflation vs Deflation continued

On Wednesday I posted that I am listening to great audio series of prominent inflationists and deflationists to understand US Dollar issues. (Sept 5th through Oct 3rd) No matter what you think of the economy direction, the policy of the US printing large sums of money, and the huge destruction of credit, are at the heart of the future of the US dollar.

Much smarter people than myself on this series are making compelling arguments for either camp. Mish(Video), Robert Precter, Mark Faber(Video), Peter Schiff (Video), Daniel R. Amerman, and Harry Dent.

For me to make sense of this, I need to break down the components, building a case of my thoughts of each topic, to culminate into a view I can make sense of. In the end, NOBODY can know the outcome, since, the outcome is dependent on what people do in the future. However, it is possible to make an educated guess based on the typical decision making pattern of the big powers involved.

My first post in this long series of Inflation vs Deflation, will be what is Money. The outcome of inflation or deflation, which is a fancy way of saying the US dollar retains/appreciates value vs moves towards being worthless, is critical to ensuring keeping wealth.

The Financial Sense News Hour posted their conclusions from both sides on October 3rd, which I will get to listen to this week. I am going to sketch out my thoughts before listening to their conclusions, then revise for my posts. I encourage you to listen to all the information presented in this series, the valuation of the USD is the elephant in the room during this crisis.