Obama on Economy

Historical note

Back on July 30th, 2009, I became concerned over market decline, and flipped from long positions, including some gold miners, to cash and/or some shorts.

It was a disastrous move. The S&P 500 was at 1,000 at that time, and the market continued to rally to 1,220. Today the markets are poised to retest the 1,040 level, and there is a chance it breaks down back to 1,000.

Amazing, its over a year later, and the market has not gained significant ground in over a year. For those with retirement nest eggs, this economy is broken. The leaders refuse to lead and instead play paper games. I really doubt we will see any significant market gains for 5 to 15 years to come.

The ONLY outlet possibility is the USD breaks down, and market can go higher, but what our cash can buy would be less internationally.

Back in July 30, 2009, SPX was about 990, GDX was at 37, GLD was at about 95.

Today August 31, 2010, SPX at about 1,048, GDX is at 53, GLD at 121.

While gold can have a major correction, it has been holding up nicely. By no means is past experience a guarantee of future returns, but it's nice to see that it has had strength while majority has weakness.

Gloomier than ever outlook

I now have a gloomier than ever outlook for the USA and with it, western countries. I have used this blog to vent my "anger" over the destruction of the US financial system, and the next bigger bubble crisis, the bond markets.

The only doubt is timeline. 2010? 2 years? 5 years? longer?

Unfortunately, as I stated in my series "Financial Ground Zero", each step takes us closer to the point of no return, and no one, not even Mr. Bernanke, knows when we cross that line.

Tim knight of the slope of hope summed it up EXACTLY on point, he said:

Tim knights post, "Unnatural Act".

Allow me to calmly and succinctly explain myself.

National governments going ever-deeper into debt to assure their citizens that the economy is going to be fine 'n' dandy isn't a cure.

It is, instead, a confession. A confession that the economies of the world are in bad shape and that politicians require the appearance of action in order to seem involved and concerned.

Printing trillions of yen and trillions of dollars isn't the path to a healthy economy. It isn't natural. It's a fake. And fake really bothers your host.

Even as a child, I intuitively knew that the Soviet Union would eventually fail. And even as a childish adult, I intuitively know the same fate awaits Bernanke. What is needed to return to a healthy economy is ingenuity, industry, and - above else - time. Time to heal.

What's happening now is an abomination, which is why I get repulsed when people embrace it as redemption. This charade isn't going to last.

This Week in Charts

It is no coincidence that Fed Chairman Ben Bernanke spoke on Friday to support market over-valuation. The market chartists where watching for high volatility as we broke down through a up trend line. Due to Friday's bounce, the trend line held. Click here for analysis of various charts that held at critical levels Friday.

However, quite a few bloggers wrote about Mr. Bernanke's comments, and basically they think the Federal Reserve is out of arrows. While I agree with these articles, I think that this Federal Reserve could be even more creative on ways to create money without work value. Time will tell if Mr. Bernanke is bluffing, will do same old tricks, or get even more creative.

Since only 7 of the federal reserve board members now thing more Quantitative Easing (basically raw printing of money) is bad, I don't think Ben is out of rope. Quite the contrary, bond rates are at a new recent low, this gives him MORE room to seal the fate of destroying the US financial system.

I am starting to think this huge ponzi scheme has 5 years before blowing up. Not because of John Chinnock's comments, but because of the bond rates. HUGE amounts of debt is being placed in 5, 10, and 30 year bonds. The government has taking vast sums of private debt, made it public debt, and put it in basically the worlds largest ticking time bomb.

For now, I'll continue to play with gold, silver, gold/silver miners, and a tiny amount of shorts.

Now to the charts, notice the SPX bounced up off of the trend line, rates jumped, gold is holding in strong.

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

Jim Rogers Video

This video is from July, but I haven't posted a video from Jim Rogers in a while.
Nothing significant has changed since July, so this video still applies.
Enjoy

Kirby Daley on Global Economic Outlook topics

One of the interesting people I have seen for economic view is Kirby Daley of NewEdge Group.

I couldn't embed the video, so click this link to watch.

Slightly older video from early August.

Stock EFT SIL vs PAAS and SLW

Reader Bob G. wrote to me:

With respect to SIL I personally think one is better off just owning PAAS and SLW. The problem with SIL is that its bogged down bu HL, CDE and SSRI the latter of which put forth a huge stock offerring about 6 months ago at $17 which has put a ceiling on that stock.

Thanks Bob, I'll diversify into PAAS and SLW.

Panic Friday

US GDP numbers will be released Friday, and there is wide expectations for some severe volatility. I am not long any stock, with exception of RJA, DBA, SIL, GDX, and GDXJ. I also have long positions on GLD and SLV. I have very few shorts, but there are some.

I will probably hold and bleed through Friday's scary action.

However, I must point out my previous folly, and how I may be about to step in it AGAIN.

If you haven't already watched my post on long term trading signal, please click here and watch/read.

Back in 2009, like an idiot I ignored this signal and closed long positions, and started to short the market as it rallied up into my face. Here I am , with not that many shorts as what looks like a hellish turn for the market down.

For your reference, the long term trading indicator is about to flip over, and we need a 1% distance to officially call this market into a down trend.

From WebSufinMurfs FinancialBlog2

Inflation, Deflation, Market direction

Mish has an excellent well thought out article on inflation v deflation and other thoughts.

I didn't have enough time to read in full detail, and hopefully I can find the time to come back and comment.

Interestingly, Mish pretty much is in line with me and John Chinnock, but notice Mish does not touch on price of Gold/Silver.

From past readings, Mish is bullish on gold/silver, while being a huge deflationist.

So it will be interesting to see how this plays out.

Please consider reading the full article, its worth your time, click here.

Guest Post, John Chinnock

Guest Post, John Chinnock, in response to my post Ditto Head.

I first want to thank Murf for letting me post on his blog. For those who don't know, Murf is an extremely busy person, and yet he always finds time to maintain and update his site, all just for the benefit of passing his knowledge and research on in an attempt to help others. Great job Murf!

As for Murf's latest post about resources vs. the U.S. Dollar, and our differences of opinion, he and I probably won't see things differently for too long. We just have a difference of opinion for the course of the next 1-3 years (ok, maybe a little longer even). Also, Murf might very well turn out to be right. Every time I have had any faith in the government doing the right thing as opposed to kicking the can of problems down the road, I have always been proven wrong, while Murf has been correct.

For my current thesis favoring deflation and a flat to strong U.S. Dollar, I just feel that we had our 20-30 years of hyperinflation already. Now a period of deflation should ensue that is longer than just 1-3 years. Think of housing as an example. In the 80's, many houses were around $50K. In 25 years, many appreciated 1000%+, ending with a blow-off bubble top. The same can be said for the Nasdaq's bubble top in 2000. I just don't feel that we're on a course to repeat these same types of performances over the next 25 years, either in stocks or in housing.

I have long thought that we would follow the model of Japan after their decline. They have had two decades of low interest rates and stagnant or deflating prices. My best guess is that the same thing happens here in the U.S. High unemployment, the contraction of lending and credit, along with changing consumer attitudes towards spending will all work together to overpower any attempts by the government to reflate. For those who doubt, look how the government just spent trillions in reflation efforts that are already failing. Further money spent will only have even more diminishing returns.

For those people who like to invest contrary to the masses, pretty much everyone thinks the U.S. Dollar is doomed at some point. I think many will be surprised. A question that many fail to ask is, doomed vs. what other currency? As bad as it is here, the U.S. has it far better than nearly everywhere else. Therefore I think that the U.S. Dollar will basically hover or slightly appreciate vs. other world currencies, and I believe that asset values (stocks and housing) will remain probably remain in a choppy directionless grind over the next five to ten years, if not even longer. What we saw was a generational peak in lending and credit which fueled a housing boom. I would not be at all surprised to see prices in the U.S. stagnate for an entire generation. In this type of environment, fixed income guaranteed investments like CDs and Treasuries will be a safe and good bet.

Again, it's all just my opinion. Murf's opinions are also very valid, and should be carefully considered by any reader.

Market at Tipping point

Gun to the head, its a very large game of chicken between the Federal Reserve Bank, the global banking system, large US investment firms like Goldman Sachs, and the stock market.

The world and US economy is in disarray. Housing falling at record rates, unemployment soaring, bond rates collapsing. The end game is near.......Or possibly Mr. Bernanke will try to kick the can again.

The last kick was a out a trillion dollars to buy about 1 year of better(?) economic outlook. Problem is, nothing fundamental was fixed. I stated this back in 2008, that the basics must be corrected, until then, all paper fixing (money, stocks, etc) will be short lived.

Quote from article, "This has been one of the most interesting days in finance ever," said Andrew Roberts, head of credit at RBS. "We are right at the tipping point. Yields are about to collapse even further, equities are about to turn over. The end game approaches, probably in next few weeks."

Contrast this with, Gold man Sachs chief economist is spouting the Fed will issue another round of QE. The mere fact GS is saying this puts it into question in my mind.

But count on this, something will be tried, my bet is on market hitting SPX 1,000. That will allow all the panic stop-losses to be triggered, and the big money to play the counter rally.

For now, as I already posted, I'm looking at gold, but beware, if the government has wised up and let the market takes it's natural course, the only safe haven is bonds.

Its anyones guess.

Ditto Head

I am 99.9% now a convert of Gary of the Smart Money Tracker. I have been bullish on gold since Sept 2008, but unfortunately, I played in other areas since then. If I was smart enough to have stuck only with gold and resources, I would have saved a bundle in losses.

Gary has a paid service, that I pay for. He is positioning for what looks like will be a huge explosion up in natural resources. (or possibly a huge failure). I'm in the camp with Gary on explosion up.

Gold/Silver valuation is about people diverting savings to "opt out" of the normal financial system. While I am NOT a proponent of "gold is money", I am a proponent that people will flee to gold in times of crisis.

Of note, the USD has been on a rally in value, and is about 83. The crux of the question comes down to will USD continue to rally, or at least trade in a range retaining value, or will it fall?

For those long time readers, you have seen my friend John Chinnock post on this blog. On this one issue, me and him are not in agreement. He has little concern over USD valuation until after 5 years from now. While I am skittish. I'm not YET in the camp the dollar will swoon into the abyss, but I do think it should continue to weaken. I mention John since he is a professional trader for over 10 years, and has been a big influence with me. And we are now parting ways on our approach. He is looking to put savings into bonds. If the USD retains or gains value, he is dead on as the right play. However, if the USD does swoon, or at the very least fear over currency games increases, the better play is in natural resources.

For now, Its still the same old mantra since July, look at buying :

GLD - 120.36

SLV - 17.99

GDX - 50.30

GDXJ - 28.60

SIL - 14.73

Food resources

RJA (food, not metals) - 8.03

DBA - 25.86

This Week in Charts

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

Hindenburg Omen confirmed

The Hindenburg Omen (click to read) is a set of criteria, that if met, shows the market is unstable. Two of these events within 10 days "confirms" the market is unstable. The likelihood of market fall historically speaking is significantly increased.

The Hindenburg Omen was confirmed on August 19th, 2010, read Slope's summary.

In my opinion this indicator should not be ignored, nor should it be followed as an absolute certainty of a pending market decline. In short, its an observation to be aware of, take it for what it is.

Direct Quote from Wikipedia:

Conclusions

From historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%, and usually takes place within the next forty days. The probability of a panic sellout was 41% and the probability of a major stock market crash was 24%. Though the Omen does not have a 100% success rate, every NYSE crash since 1985 has been preceded by a Hindenburg Omen. Of the previous 25 confirmed signals only two (8%) have failed to predict at least mild (2.0% to 4.9%) declines.

Because of the specific and seemingly random nature of the Hindenburg Omen criteria, the phenomenon may be simply a case of overfitting. That is, by backtesting through a large data set with many different variables, correlations can be found that don't really have predictive significance. The Omen is at best an imperfect technical indicator that is a work in progress.

Senator Ted Kaufman calls on SEC to fix negligence

The flash crash earlier this is now known on blogging world as caused by problems with the electronic trading system and by large computerized trading programs that where pre-programmed to take advantage of these flaws.

The Consolidated Quote System which acts as a computerized clearing house for trading has been shown to be flawed. These flaws do not benefit common citizens, but rather specialized large trading houses that can take advantage of them with high frequency trading.

Finally a government official, Senator Ted Kaufman, is writing letters to the SEC asking them to fix the corrupt trading system that benefits the few, at the expense of the many.

Click to read from Zero-hedge full article explaining the "proof" and the senators letter.

Shout out to my brother, the SEC will prosecute if you trade a single share, rather than 100 shares, calling it market manipulation. But millions of shares using computerized trade delays is OK.

Obama - Bush Tax changes

Excellent visual on impact of keeping all of bush tax cuts in place, Obama's changes, or allowing Bush tax cuts to expire.

See Washington post interactive graph by clicking here.

Bottom line, no tax increases for those making under about 110k per year, and lion-share to those making over 500K.

Notice we are talking 700 billion dollars in government "revenues" through taxes, and still 3 TRILLION in missing revenues. Pretty big jump.

Warning on Long Term Trading Signal

Very early in this blog, I posted on a long term trading signal that people can use for investing. Unfortunately, back in 2009 I saw the signal flip to "buy", but I ignored it at my own peril.

A bit burned, hopefully a bit wiser, I am keeping an eye on this signal. The lines have NOT yet crossed into sell, but it is looking a little ugly. I suspect in the next 8 weeks, we will have the final answer.

If you haven't read my post yet on this trading signal, please click here, it is a MUST watch for anyone investing. Like all tools, it isn't 100%, but it is sure better than any other metric I have ever seen.

From WebSufinMurfs FinancialBlog2

Fed Meeting Tuesday

The market rallied Monday, and with the Fed meeting Tuesday it's anyone's guess.

My guess is Ben and company know that charters are watching, and waiting to do a pile on for a market collapse.

Since Mr. Bernanke has made it his life's mission to prove his theories of monetary policy are right, and that he alone can avoid the aftermath from a spending spree, my guess is he will kick the can once again.

It is possible Mr. Bernanke WON'T kick the can on Tuesday, and the market will fall disappointed. But that layup will only give him room to kick the can later as a reaction.

So for Tuesday, it's really who knows. The pessimist in me says Mr. Bernanke will pull some stunt breaking the back of the USD dollar through the 80 level, and the market rallies.

But if he doesn't, I doubt he has the will to stand aside if the dow breaks below 1,000.

This Week's Scary Charts

By now, if you still read my blog, you can rename me chicken little, the sky is falling. Also I have been flip flopping quite much on market doom vs treading water.

But I got to tell ya, the charts today are not pretty. The market really needs a good old fashion rally this week to get itself off of the lower bound area. Friday's weakness was not promising. Couple that with the US dollar about to test a critical level, 80, and the 10 year US treasury note yield rates dropping back to crisis levels.

Its pretty scary out there. I may put tons of stops in, or just go cash. I don't think I can take this playing with fire bs anymore. I know cash has been and will continue to be king, until the USD currency becomes under attack. But I don't think thats in the cards yet. There are too many other countries worse than the US, and if the US needs a boost, it will be time to kick another country to the fire to make the US temporarily look better. First Iceland, then Ireland, then Greece. There is a long parade that has to go by before the finale act.

Good luck to everyone. There is no right play, just a lucky one. This government better announce QE2, or some other idiotic measure to kick the can a little longer. As I previously mentioned, one of the advisors I pay for said get out of dodge a couple of weeks ago.

As I go to bed, I hope I don't wake up to some horrifically lower open. I may sit in cash and only go long gold / gold miner AFTER they break new highs as a sign time to jump in with both feet.

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

Stock Screener

If you are looking for ideas on where to enter into a stock trade, a good method is to setup criteria you are looking for, then scan across a large number of stocks to see which fits your description.

This is typically called a "stock screener".

I ran across a web site that offers stock screening called FinViz.com , check it out. (click on link).

Say you like the idea of purchasing stock when there is insider stock purchasing happening.

I reviewed that screener (click), and out of all of the insider stock purchases, the one that looks most interesting is PCX. From a chart perspective, looks OK to buy a little here. I wouldn't load the boat. After all, insiders at bear sterns probably lost their shirt in stock options. So insiders may not be any smarter than you.

Like to catch falling knives? Try the biggest loser page. Drugstore.com if you don't think they are going to implode doesn't look too horrible to buy between 2 and 1.50.

The site also has a nice pictorial image of ALL stocks in the S&P 500 what they did the previous day. A really nice at-a-glance screener.

So check out FinViz today! (I'll add to my recommended tool list on right of blog)

Monetary system failings

I have read, and been thinking about money as a problem. A problem that all of society depend upon for functioning. In many aspects a good money system is more critical than fresh water, food, or even air. Without a good monetary system humans would literally not be able to evolve much further than everyone being farmers and hunters.

The function of money, as I previously discussed, has a basic issue. When work is done by a person A for Person B, Person B now has a debt. In effect Person B must provide the amount of work VALUE as person A to repay that debt.

The problem, writing a debt note, is rampant with corruption possibilities. The true nature of the corruption is the act of creating the debt note. A third person not involved in the transaction has no easy way to verify the debt note authenticity. Furthermore, a third person accepting the debt note has no way to ensure exchanging the note with anyone other than the person who wrote it.

So the true nature of money is a system to track the AUTHENTICITY of work being done. Also money has to have the ability to be UNIVERSALLY ACCEPTED. Finally, by limiting the power to create money to a few (such as a one entity, like a government), the risk of creating money for no work done (in effect, distorting the money) is greatly reduced.

The problem comes when the entity responsible for creating money succumbs to temptation of creating money without work done. When the central entity in effect doesn't uphold the standards of money creation, retaining it's value.

So therein lies the problem, you want money to be created as a debt note on a person-by-person basis. Creation of wealth is the ACT of doing work for another person, and that person then owes the same value of work back. But creating debt notes on a person-by-person basis is not trustworthy nor is it universally accepted. Therefore, a central agency such as a government creates money in a reasonable fashion to represent the work being generated by society within a reasonable range of accuracy.

Too few dollars created by central government

If the central authority creates money say at the rate of ZERO new dollars per year, the effect on society would be devastating. This can happen when money is based on precious metals such as gold. If a government can only produce X coins per year due to limited production capability, you starve the societies prosperity.

Too many dollars created by central government

If the central government produces too much money for work being done, the government in effect is committing fraud, akin to what would occur if individuals where allowed to make money. This results in currency devaluation, or even collapse. Some economists equate this to the word inflation. Inflation is a word I avoid, since it is used to describe too many different aspects of monetary valuation and policy. I prefer currency devaluation to be more accurate.

Creating dollars by central government AND banks

The US and most of the world use a money and credit creation system called Fractional Reserve Lending. When banks acquire new monetary assets, they can lend out MORE than they have in assets. The ratio of leverage is restricted by the government managing the monetary system. The level that is rational for maintaining low risk is of great debate. A ratio of 1:1 in effect means the bank can only lend out money they have in storage. A ratio of 2:1 in effect allows the banks to create credit at the rate of 2 dollars for every one they have.

Bear Sterns and others had ratio's of 30:1. THIRTY to ONE! That means if one of those loans goes completely south (cannot be paid back), the other 29 dollars have NO assets backing those loans. In effect Bear Sterns would have created money in the form of credit, in a fraudulent manner. Such high leverage by most (not everyone) is considered unsound. I am of the opinion leverage should be set between 1:1 to 4:1 in a Fractional Reserve Lending system.

The benefits of a Fractional Reserve Lending system is it allows money (in the form of credit, which in effect IS money) to be created by others, not just the government! This system comes closer to the ideal system where each person could create money when they do work for another person. By allowing others to create money than the central authority, money in theory can be more effectively created as demanded by the productivity of society.

In a pure precious metal monetary system, the ability to create debt notes for work done would be put into the hands of the very few. A Fractional Reserve Lending standard is in effect an extension of FIAT currencies, and therefore money is not backed by precious metals.

Unfortunately, Fractional Reserve Lending systems also fail because of two sources. First is, the government FIAT currency creation is done in an unsound manner. The banks are also empowered to do the same and can create massive fraud due to high ratio's. (in a 2:1, worst case is create 1 "fake" dollar for every dollar, for example) The higher ratios allow just by pure mathematics more fraudulent loans to be possible in relation to every true dollar saved.

Money Creation Tax

In the US based system, the US government cannot create debt notes without an attached "tax" to each dollar created. In my original money creation example of two farmers, when the farmer exchanges food to a shoe maker, it would be like attaching a interest rate to be paid to a third party for the privilege of the shoe maker writing a debt note. This unseen "tax" on every dollar created eats away at the wealth of society generated, and is a large reason for currency devaluation. The debt based system spirals out of control, eventually collapsing. In the US based system each dollar created by the US government must be first be backed by selling a bond. If the purpose of creating money is to capture work done, this interest rate is not required. Why should the US government have to pay banks to create money? Why do they have some sort of special rite to be the masters of money creation?

Money creation belongs to the people, those who create the work, those who are OWED work. Not the banks.

A better Monetary system

This post turned out to be pretty long. I'll create a new post of my thoughts of a better monetary system.

(thanks to John and Swan for proofreading)

This Week in Charts

This week in charts. Really nothing much to say, market slowly rising, dollar is falling rather fast, and gold is in a scary state. The US 30 year rate is clearly moving up. That isn't good for our debt nation. But nothing is in scary state yet.

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

From WebSufinMurfs FinancialBlog2

Gold is money is threat to all governments

I have witnessed a rising tide of sentiment that Precious metals is the only true form of money. This is a complete distortion of reality. Gold is a precious metal and has a value, just like a piece of coal. Gold and precious metals are NOT money. They do provide a convenient material to make objects, such as coins, and have an intrinsic value (above zero value) that has lasted literally 1,000's of years. However, if money was made of say, diamonds, one could argue only diamonds are the true form of money.

Money is by definition:

Money is any object that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally, a standard of deferred payment.

Notice, no where does money have to be made of precious metals. Money could be made of precious metals. When it is, it has the added value of possibly being melted down to it's raw form and have the value of that material, in an alternate money system.

The political power of being able to create "money", in whatever form, is where immense political power is derived. It is no coincidence that throughout time, money is almost always made by governments, banks, or religious groups. Going back to my description of Money, there are flaws in each of us making our own "money".

However, anytime money is made by fiat, meaning it is declared face value with no commodity backing its value (such as gold), humanity has a tendency to destroy it's purchasing power.

Why? Because humans by nature are lazy and corrupt. Over time apathy sets in and the worst of humanity's excesses overcome the society. Fiat currencies aren't doomed for failure because they are fiat currencies. They are doomed because over time people are ABLE to destroy the system. The system itself allows apathy and corruption to destroy the value of money.

Every civilization who uses fiat currencies has managed to destroy their currency, and with it typically the organization that creates the money collapses.

I hope to do another post about credible, viable, long lasting money systems that I believe one of eventually will become the new money system. But for now I wanted to state clearly my position that tying creating of money to precious metals transfers the "power" behind money creation to two entities. The minting organization, and the precious metal mining rights holders.

Forcing all wealth creation to digging a shiny rock out of the ground, and mandating it is required to "capture" the value of work, is a path to ruin. I do not believe (prove me wrong) that gold based money standard has NEVER produced a long lasting wealthy middle class and lead to economic prosperity. I challenge anyone reading this post to give an example.

Putting money creation into the hands of the few, fiat or precious metal money, is folly for the masses. With that said, I do believe we run the risk across the world for everyone to rush to gold and silver as the last bastion of hope for money.

This video below shows that in some countries, islamic groups are printing gold dinars and silver durhams to store wealth. While I agree this does work, it will fail to produce a wealthy society if adopted across the board.

Thanks for Ryan Swan for submitting this video.