Deflation everywhere, except monetary policy

The typical view many armchair economists take is viewing the capital markets and central bank policies, calling foul when central planners bend or break the law in the spirit of saving the economy.

I agree in spirit that central planning is bad vs free markets.  If a regulated, transparent capital market was set free to evolve on it's own, there is no question in my mind that the world will adapt to change much faster, and efficiently.

But what most miss is part of the problem IS efficiency.  Technology RUTHLESSLY tears down inefficient and helps evolved business and social fabric to a more efficient model.   What efficiency effects are basically less people can do more.  Meaning, you don't need as much middlemen from the Makers to the Consumers.
As this happens, the net result is if your not a maker, or wealthy enough to be a eager consumer, you fall into the cracks.  This group of people is ever widening, as technology moves forward.

What compounds this effect is global trade efficiency, in effect allowing others around the world compete for work.  Net this is a good thing, for people who most desperately needs work can get work.  But the effect when looked at closer can be more personal and disturbing.  Plus global trade raises questions of what is efficiency....and what is fair.

Easier examples of technology efficiency effect is music industry, software makers, open hardware, financial trading, retail distribution, farming, and hosts of other industries.  When you look at each one to see how they have changed and are changing over the last decade, it is easy to see the displacement of workers.

The makers and consumers benefit from a more direct relationship, yielding cheaper prices and more competition.  But the channel distribution now yields less workers.  Consider WalMart vs mom and pop stores across the country, music stores vs iTunes, local book store vs Amazon.
Farming is moving towards 100% robots ...except for on-call mechanics...as cheap labor is driven out by cheaper labor, robots.

When you see the changing landscape, if left up to a more efficient market, we may see honest assessment of unemployment in USA of 25% or more.  Possibly in some areas of Europe of 50%.  By artificially keeping inefficient human processes afloat with Government spending, Central Bank intervention, what is being done is avoiding the reality today in hope a better answer appears tomorrow.
Extrapolating into the future, (with DOUBLING of technology every 18 months!) this problem will accelerate.  Picture a world where renewable energy accounts for 75% of energy use, self driving cars, planes, google glass, and robotic factories.  A world where a flexible robot can be easily adapted to a wide variety of custom tasks.  This is NOT a world of full employment, for those less skilled simply cannot compete vs automation.

So when people pound the ground that we need to return to an efficient capital marketplace, you best be a maker, a skilled specialist, or a well positioned consumer, for the rest may not like the world that leaves them out.

Nigel Farage and the Fall of Europe

I have posted on Nigel Farage before, a shrewd politician who speaks directly on the weakness of European Financial positions.

This interview is a good one on Nigel.  My only hesitation with Mr. Farage is I am unsure of what his long term objectives are.  The stereo typical politician panders to the fundraisers, explaining why Nigel stands out so much.  A good watch none the less.  at 25 minutes in, a good commentary from Jamie Diamond and purchase of Bear Sterns with Government encouragement.

In Europe news, Greece unemployment 25% and climbing, French Economy taking a hard turn down, Spanish bonds being dumped abroad, and European union secession support gains in Belgium.

Market Musings

A week ago I posted "Getting out of the Market", over the next couple of days the market went higher after I sold, SPX was about 1450 at the open, and  the market closed on Thursday and Friday at about 1460, with intra-day high at about 1470.  Today Market closed at about 1432.

My goal is to stay out of the market until SPX hits above 1557, or pulls back to 1250 and I re-evaluate.
Of course, any major news can change my opinion.

Gary of Smart Money Tracker is calling for new highs, passing SPX 1557, click here to read.
Anything is possible.

Good luck.

Makers

I am going to deviate from the theme of this blog, and start covering Makers and financial news.
Why? Because I believe Making is a key role of America for the next 100 years.

America is a story of making, since its founding.  America Maked and the world taked.
Since Reagan with trade agreements favoring China and the world, America has reduced making substantially.

The new Making revolution I am witnessing is the start of the rebirth, not just of America, but of western society.   As it grows it will change society view of the order of things.  It will also bring investment opportunities the likes of Microsoft and Apple to us.  The fun will be spotting the biggest winners and investing.   For more on making click label Maker on bottom of any article or here.

My friend Bob sent me a link on a nifty video of a Heli-copter-thingie that someone made.
I highly recommend full screen, in a quiet room, watch and enjoy.

Heli showreel late summer 2012 from Esben Nielsen on Vimeo.

Jim Chanos and China Economics

This video is a few weeks old, but great to watch.
Jim Chanos talks frankly about China and how their miracle growth isn't there.

I recommend a watch, click here.

Jim Crammer spars with Chanos on china

Credit Card Cash Back

This is a follow up to post "Saving Money With Credit Cards".  See also "Paying off Credit Cards"

Since that post, I acquired the primary three cards mentioned in the post, and since then flushed out details.
To help you calculate your annual savings, I have put together an Google Spreadsheet, accessible below.

Short version is by getting these three credit cards, you can maximize your cash back from all household spending.   Your spending habits may reflect different categories selected by the USBank card, which offers 12 different 5% categories for cash back.  Fidelity Investments card does require an account to recieve 2% back on all purchases, which may be worth while depending on your spending habits.   A typical American Express or other point systems work out to 1/2% to 1% cash back, excluding travel rewards.

For most families, the 6% Grocery and 3% gas cash back is well worth getting American Express Blue Preferred card. (Max $6000 per year for grocery)
NOTE: if you get two cards, one for him different account for her, can get back on 12,000 per year for groceries!

To access the sheet, click on the image below or the link here.
*WARNING* If someone else is modifying the sheet at same time as you, you will see each other making changes.  To get a private copy select "File" then "Download as" and pick EXCEL. Or come back later when the sheet is not in use.  Look in upper right corner to see if others are viewing the sheet.

I used stickers to mark the cards to make it easier to follow.  You can access the template I used for Avery Template 5162 by clicking here.  It will look messed up, you need to download the file. Click "File" then choose Download.

I researched American Express points, various Citibank cards, and other rewards.  Excluding travel rewards, the cards above are the best rewards I could find.  If you find better, please click the word comments below to add to this post.

After searching the web, it seems cash back is considered a discount, not income.  Only tax implication is if you spend 100 bucks, you can write off 98 bucks (2% Cash Back) as an expense.

Alternately, you can SELL your points for cash, at a 'grey' market vendor I had no issues with, www.rewards2cash.com.  If you sell your points, buy airfare on sale and get points it usually works out better.

UPDATE: I booked flights with Amex points.  The airfare was 841 bucks.  The points to pay for it was 84100 points.  Since each 1 dollar gives 1 point, that works out exactly 1% payback.  Therefore best ROI is to get cards above and simply pay for airfare from cash back, and as bonus get additional 2% off the airfare itself.   It is possible to get special trips for better ROI if shopping offerings.

Manufacturing Revolution Revisited

This past weekend I went to MakerFaire in NYC.  This is related to the post I did titled American Manufacturing Revolution.  The phrase Maker in this context refers to people who...make things.  As an engineer, I focus on 3d printers, Arduino, Rasberry Pi, Robotics, and manufacturing machines like laser cutters.   However Maker can refer to anyone who makes including artists, musicians, foodies, etc.

I linked to various terms above if unfamiliar with terms.   Seeing the capabilities of the 3d printers, the influence of Arduinos, and robot progress, I am very convinced we are back in the IBM PC days of 1981 for this new technological revolution.  I believe 3d printers and other related tech are moving towards Moores law, where we will start seeing great progress in capability every 18 months.

It is not out of the question that in 16 years, we will have a sort of Star-Trek machine that can create anything we want made of metal and plastic, even simple electronics.  30 years, print your own cell phone.

Like any new trend, the gains are greatest earlier relative to the previous tech level.

So I bring you below videos from Makerfaire.  As for investing, well...I messed up on that one.  When I posted the American Manufacturing Revolution post in Dec 2011, if I immediately bought 3d printer stocks, I would have done fan-tastic.  Not to say its too late, but I don't want to buy in earnest unless I see a fire sale after such a quick rise.  I may buy a little of each for now. (100 shares)
Stocks to look at: ssys , ddd, ARCM (Swedish)
More interesting is 3d printing organs...yes, you read that right.  ONVO , (TOO SPECULATIVE!)
Makerbot is NOT yet public, but I believe they are moving in that direction.  They closed sourced their latest printer.

Videos!

Presidential Debate #1

I enjoyed watching the presidential debate tonight.  Romney left with a much better impression than I started with.

However both candidates lied heavily tonight.  I am amazed that Romney didn't asked on anything Obama said he would do....why didn't he try last week, last year?

Why do I say both lie?  Balance budgets but cut nothing that drives 90% of the costs....the magical 10% left will reduce 33% of the government spending.....right.

For the first time in my life, I like no candidates.  None.   Maybe thats a sign I have matured to an adult finally.   Anyway, worth a watch.  Romney got his ass handed to him in past weeks, now the media will hype the comeback, yawn, same thing each election.

Economic Outlook from CEOs, Bernanke, and Beyond

Thanks for Mish for his post US CEOs Sharply Reduce Expectations for Economic Outlook, Hiring; Third Largest Plunge in 6-Month Expectations in History; Reflections On "Uncertainty".

The survey hasn't seen this outlook level since 2009, inferring a slowdown is upon us.

Ben Bernanke must have read my post on Monday.  Mish reports Bernanke Begs Congress to Address "Fiscal Cliff", Pledges to Hold Interest Rates Near Zero Through Mid-2015 Even If Economy Picks Up
Which is exactly what I posted on Monday, that the fiscal cliff is going to be a political showdown at the expense of US citizens and the world.  Mr. Bernanke not only promised to purchase 40 Billion per month indefinitely  but keep low interest rates through 2015.  Once again, I ask you, what else can the fed do to prop up inflated asset prices?  There is always more, but only if there is a situation that justifies taking more extreme measures.

Looks like Austerity is the fad in Europe, and France has joined Greece, Spain, Italy, Portugal and others in cutting back spending.  As governments around the world grow more conservative in spending, is that a economic boom or would deflation likely follow.....
Mish reports Austerity Programs Hit France; Marchers Demand Vote on Treaty; Hollande Reneges on Campaign Promise

To add fuel to the Europe fire, Mish reports Concerns Mount that ECB Bond-Buying Program Is Illegal; Concerns? What Concerns?.   If the ECB was forced to stop bond buying, even for a few months, it would be devastating to prices.

The US Federal Debt is now at over 16 Trillion dollars.   The US GDP is about 16 Trillion dollars.  Congratulations USA, we now owe as much as the entire US Generates in 1 year!.  At this point the debt should never be paid back, not that anyone believes it will.  The real issue is not actually paying back, but the interest alone today every citizen owes the US is 12K and counting.  The interest will strangle the US budget and economy in the years ahead.

What we may be facing in the years ahead is not an Arab Spring, but a World Spring, as the central banks perversion of risk pricing, asset inflation, and capitalism distortions create more acute pain.  2013 is looking to be a real fun year, and at some point I'll do gold and gold miners again.

Getting out of the Market

Update: see post Market Musings
Monday AM update: Gold spiking up VERY fast, same with Oil, I am sticking with my plan below
I have given quote some thought about the market as of recent.
I have decided to "get out of dodge" for now, the reasons.

1. I waffled quite a bit the last week or so.  Such waffling usually means I am fighting fear and greed, and greed is winning.  Usually a bad thing.
2. Gary of Smart money tracker is also waffling.  
3. The Federal Reserve bank did blow its big announcement, buying 40 billion EVERY month indefinitely of US troubled mortgages from banks.  Not sure how they can top that one in the near future.  And to top it, I assume something bad will happen first.
4. If Obama wins, the republicans may make Obama's life difficult when tax increases occur in January.  I do not like the current democrats OR republicans.  All they have to do is NOT play nice with dems and allow taxes to increase in January, as it is set now.  That should really put the nail on any optimism.
5. Miners etf went from 40 bucks to 54 bucks in couple of months or so.  30% gain when 30 year bonds pay 3%...lets not get too greedy.
6. I will eat my hat, and turn around when the market hits a mere 100 points higher on the S&P 500 from recent high of 1447 to 1557, topping the old high back in 2007.  I can miss those 100 points if I am wrong, but rather miss losses of 100's of points if we decline.  Re-valuate at 1250 or so.
7. I said to sell on any strength last week, and frankly, if I had done that it would have been perfect timing.  Best to get out of dodge before more damage is done.

So there ya have it.  I am dumping almost across the board.  irony is I'll probably keep Facebook, Groupon, and Zenga from the post a while back, they got soooo beat up, eh, they may buck.

I will keep Tiny core positions.  I'll sit on my hands until above 1557 or radical news comes out.

Look at the chart below, really, why hold for 100 more up? I'll rebuy then when proven wrong.

Influences are across the board, including John, Slope of Hope (click, nice vid), Gary, and reality (click).

All Clear?

Friday AM update: decided to sit on my hands, dont sell what I got, dont buy more. I want to read and look at charts indepth before buying.
This is a crazy world, I posted much fear in last few posts, and here I am bullish again.
Obviously, I could post in couple of days running for the hills.

One thing I think is that this administration will NOT allow another market crash like Bush had.
So on that one gut alone, it pushes me towards Gary and not my friend John.

Gary posted here about oil bottoming, and stocks maybe in a 'runaway move'.  I highly recommend you click there and pay the trial 10 bucks for his newsletter.

Another aspect is my lack of faith I have in the USD valuation.  It ran up for a year, and now I believe we are on the downswing in the year ahead.
This should help increase valuations of gold, oil, etc.  So between Gary, the USD, and my faith in corruption, I am going back into miners. ETF GDX & GDXJ  So much for me selling on strength.

I will check the futures in the AM to confirm this intent.

Market Cycles

My friend John, a professional securities trader, has recently become bearish enough to put a toe into shorting the market, for near term.  He views the market movements after QE1, QE2, different than current after QE3.  The market movement difference now has encouraged him to take a bearish stance on the market.

If you read the news, there is plenty of bearish news to back up this view.  Fedex shipping is down, which can be compared to GDP forecasting, California sales tax revenue declined 20% YOY in August,  IMF chief warns of US financial issues in short, medium, and long term, Eurozone is seeing steepest contraction since 2009, Japan exports contract 3rd month in a row and China PMI contracts, Toronto home sales decline 64 percent (due to law change).
Pile on the Euro news with Greece, France, and Spain seeing Neo-Nazi fractions rising threatening those countries status quo.

Now lets look at the opposite view, there is plenty to find, but I am quoting the top two from my perspective. The Federal Reserve bank believes QE3 will help the US economy, as QE1 and QE2 did in the marketplace.

My favorite market watcher Gary of Smart Money tracker is calling for a "near term" bottom with market reversal.  Gary isn't the sort to make super long term predictions like the year ahead, he watches cycles to see next move.

So what is next?  A market fall of significance is always in the cards, especially if you look at history now or in the Great Depression.  (currency wars occurred back then too)  I am mixed, while I don't think in the year ahead we will see 30% market gains, it is possible the market finds a dead range of +10% and -10%.  My inner voice tells me the market is very weak and going to implode, but then again, I have heard that voice a few times in the last few years.

A conservative stance is probably in order, and on any strength, I may continue to lighten to be nimble.

Ronald Reagan Director of OM and Budget

David Stockman was Ronald Reagan's Director of Office Management and Budget, and was recently interviewed on effect of the Federal Reserve bank.  I completely agree centralized force trying to alter capitalistic cycles.  The Fed can distort the capital markets, but it cannot fix by meddling with loose monetary standards.

If the fed exists at all, it should intervene ONLY in a 2008 type event.  But the irony is 2008 event wouldn't have happened if the Fed didn't blow that credit bubble in the first place.  Sorta like a pyro who's dayjob is fireman.   Justifying one's job by putting out your own fires.

I don't dislike the fed because of bankers, or top 1%.  I dislike the fed because a small group of people in power cannot contain capitalistic forces.  It's like trying to control evolution, something bigger than human kind.   The central authorities will be broken by technology, as I discussed before in post "Technology, the Ultimate destructor of inefficiencies"

USD fell quickly, time for a break?

The USD broke DOWN from the uptrend started back in August 2011.  After a year of USD gains, time for some down pressure.  Recently USD fell quite a bit in a reasonably short period.  I expect a couple of weeks of sideways before resuming down.
If this happens, gold, oil, etc may lose some gains before resuming the uptrend.
Heck its possible USD gains strength and resume up, but it seem unlikely.

So hang tight, some in, take some profits, and wait.
Gary of smart money tracker posts cycles, etc, but I simply like the chart below to tell a story.

Marc Faber on US Economics

Mark Faber is one of the best people to listen to on economics.  He is direct and a very serious investor.  He has some not so kind words for the US economic outlook, and it is well worth a watch.

In-depth interview.

Karl Denninger speaks at Republican Liberty Caucus

Karl is one of the few verbose and articulate outspoken bloggers on various finance, political, and social issues. His blog the Market Ticker is a must read. Watch and decide for yourself on Karl. >

Gold, Silver, and Oil, is the sky the limit?

There are huge forces in the global economy at work increasingly intense since 2008.

First we have the demographics of the baby boomers.  The Baby Boomers have basically dictated my entire job outlook and financial health.  As they go quietly into retirement, the shift will put strains breaking so many ponzi-like financial models such as Social Security, Pension funds, Medicare, etc.  And its not just USA, its Europe too.

Couple that with internet and computer efficiency ripping the face off of everything.  Anything that can be outsourced, is.  Anything that can be automated is being automated.  Never in history of mankind can so few people accomplish so much with robots, computer networks, and technological innovation.  Net effect is less  people employed to do same work. (Think checkout lines, toll booths, phone operators, etc, list is endless).

There is no question the USA lead a credit bubble of epic levels that popped in 2008.  But the US has not reformed anything, and instead is re-inflating the same old bubbles.   This may have been tempered by Europe and China, but recently, it seems they are changing too.

Europe had a model that required fiscal discipline, which by now should be well recognized to have been a little misguided.  The ECB is on track for monetizing debt USA style.  As this becomes reality, a MAJOR deflationary force will cease, or at minimum slow down.  For if countries don't implode like dominoes in Europe, then deflationary forces are reduced.

China was on track for reforming from export nation to consumer nation.  And they may still be.  However, the shift is proving painful, so painful that their next leader to lead the next revolution is MIA.  Mish has great summary of the situation.  If it turns out China is going to go back to export nation full steam ahead and not see through reform to consumer nation, yet another global force is shifting back.

Ben Bernanke of the US Federal Reserve will be on track for owning large part of the US Mortgage market, upwards of half in a few years with latest announcement.

Couple the above forces to reduce deflation, couple that with political tension escalating.
China fighting over Japan for territorial issues, US embassy attacked in Egypt, I see this possibly escalating as tensions rise economically.

I see this all good for precious metals and oil.  Political tension, deflationary reduction on a "monetary" level, counter to employment deflationary forces which still persist.  Jeffrey Lacker of the Federal Reserve sees inflation as a likely outcome.

The world is entering into a global recession, but with intense efforts from US, Europe, China, and elsewhere this next recession may be short, followed by intense commodity price upsurge.

A global economic cascade like 2008 could derail this view, but barring a deflationary event, I see resources are at a good entry point.  STAY AWAY from industrial metals, as china has been primary driver, and has huge over-stocks on supplies.

GLD, SLV, GDX, GDXJ, OIH, GCC, and DBA are decent ETF's to look at, however this week we should hopefully see a pullback.

With the USD having plenty of room to fall further, all of this makes for interesting observation.

Miner positions

Big risk, big reward, etc.
So holding everything into Thursday was the right thing to do.
I have started to re-add positions, to the ones I kept.
Always keeping an open eye for weakness.

Federal Reserve Announces

I am not impressed, markets may rise day, week, two weeks, but then the slide will resume.
But who knows, I have been wrong a few times :)


Release Date: September 13, 2012 

For immediate release 
Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.

China Financial Ponzi Schemes

Mish over at Global Economic Analysis reports on China's shadow banking collapse.
This was easy to see by anyone paying attention years ago as China ramped up mal-investment on a scale never seen before.  I have reports some of it, click here for past items.

Recommend reading Mish's article titled "China's Shadow Banking System Collapses Exposing Numerous Ponzi Schemes; Implosion Reaches Critical Mass" and all the sub-articles.

Quote from Bloomberg Article that I found interesting, give a snapshot of the deflationary forces they face:


Only 3 percent of those companies are able to get bank loans, according to Citic Securities Co. (6030), the nation’s biggest publicly traded brokerage, with underground lending by family, friends and acquaintances largely funding the rest.
As growth from low-cost labor and productivity gains from adapting technologies developed abroad lose steam, China’s future expansion must rely more on an efficient distribution of capital, as well as on increased innovation and the development of service industries, the World Bank wrote in “China 2030,” a report published in February.
Tamping down underground lending as the economy cools poses risks, said Fred Hu, a Beijing-based economist and former greater China chairman at Goldman Sachs Group Inc.
“Shadow banking is much vilified, but without it the Chinese economy would have had a hard landing long ago,” Hu said. “The issue here is how to legitimize the sector and make it more transparent to reduce some of the potential downside risks, but not to shut it down. If the government were to try, that would do terrible damage to the economy.”

A recent video of Jim Chanos, my favorite investor deflationist.