“The USSR had two newspapers, Pravda and Izvestia.  In the Russian language, “pravda” means truth and “izvestia” means news.  The saying amongst the Russian people put the situation in a nutshell:  “There’s no Pravda in Izvestia and there’s no Izvestia in Pravda”.” – The Privateer

‘You heard it here first’ and ‘Mark my words’ are the hackneyed phrases that come to mind as I begin to type this missive. I will add the oft used ‘I’m going out on a limb’ as I write the following:

The stock markets and commodity markets will not collapse when QE2 ends in June.  In fact, said markets will most likely rally.

So, why am I willing to shimmy out onto a limb that looks ravaged by disease? Because I either enjoy the danger(possible) or in all humility I see something about the entire tree others are choosing to ignore.

One can no more accuse a tree of being deaf and dumb as one can complain about the dropping of leaves on the ground because that is its nature. The same can be said of our Fed chairman, Ben Bernanke, so we can’t blame him for dropping tons of paper on the markets. He is who he is, plain and simple. He wrote dissertations on the benefits of easy money and helicopter drops of cash. So to blame him for executing his plan is futile. And to assume that the end of QE2 in June will usher in a new austere Fed chairman is to believe the proverbial leopard can change.

In fact, the Chairsatan(thank Zero Hedge for that moniker) has already begun speaking of continued accommodation, “…during the Fed Chairman’s first post FOMC meeting press conference ever on April 27, Mr Bernanke did state that the Fed was not going “cold turkey”.  He assured us that the proceeds from “maturing assets” in the Fed’s $US 2.7 TRILLION balance sheet will continue to be deployed in the Treasury debt markets.”- The Privateer.

I propose we dispense with the ridiculous ‘debate’ currently raging within the financial media about what happens at the end of QE2 and when QE3 will begin. Moreover, I would submit to you that by continuing this worthless ‘debate’ we are allowing our collective selves to become susceptible to further Fed prestidigitation.

Here is the set up for Fed Three Card Monty come June: Easy monetary policy must continue, this is a certainty(if you wish to argue this inevitability as well as other obvious laws like gravity and the color blue as relates to the sky then please navigate away from this blog, do a little research and then feel free to rejoin us at the adult table). However, Bernanke understands that a continuous trail of QE3, QE4, etc. will have diminishing returns and will be too easy for traders to follow and fade. The key for the Chairsatan is to create an environment for continued asset appreciation(US$ devaluation) without the easily recognizable QE POMO programs. So while the financial media is looking left debating quantitative easing as we currently know it, the Fed is moving right creating new QE devices to prop up markets.

Stock Market Strategy: Bernanke QE Ends June Stocks Commodities Will Rally

I don’t profess to know what the new QE devices will look like. They could be new ways of increasing the velocity of money as opposed to the amount or we could see new enormous QE programs out of Japan that somehow miraculously find their way into our markets. A mysterious large buyer with an insatiable appetite for US treasuries could emerge from the Caribbean as seen before, ” Purchases of U.S. debt remained relatively healthy from November to December, with buyers such as Japan, the United Kingdom, Brazil and Caribbean banking centers stepping up acquisitions in the final month of 2009.” - WSJ

Whatever the case may be rest assured the Fed’s goal is to have asset prices levitate when QE ‘ends’. The deception will be complete in the weeks following the termination of QE2 when the WSJ et al headlines read, “QE Ends but Markets Continue Higher Lifting Confidence Fed Plan is Working”. I beseech you, don’t play the part of the Times Square Tourist or you to will eventually be separated from your money.

Tags: ben bernanke, Bernanke, Brazil, caribbean, commodities, debt, Japan, POMO, QE, QE2, QE3, stocks, Treasury, WSJ

Comments feed (RSS 2.0), comment or trackback from your site.

            It is now evident that this recession has uncovered a number of substantial flaws in our country’s financial industry. The now-exposed wounds became so complex that it took a meltdown of this size to identify them and it will take a long, sluggish recovery for them to heal. The majority of the flaws in our financial system hit individual investors the hardest. Faced with frauds, unclear loan agreements, mislabeled ratings and much more; individual investors have felt the pain and are now changing their behaviors in order to wisely navigate through this new investment jungle.

            In this new, heavily-battered playing field, I have seen one group of investors disguised as two vastly different types of investors. They appear to have swapped each other spots on the risk spectrum, but the groups are really one in the same. The first type is the group that fears more losses so much that they are persuaded to stay out of the game. The second is the group of investors that has been chasing risky investments in an attempt to quickly recoup the wealth they lost in the crash. Once this type of investor wins back their losses, they pull out and leave the game; joining the first type of investor on the sidelines. These groups share a trait that makes them more similar than different: They both fear the current market.

Emotion and speculation fueled many investors before the bust and will certainly again fuel the masses during the next boom. The tendency to chase easy money is in our hardwiring and it is a difficult force to resist. Now, as is the case immediately following any recession, investors are cautious. But, this caution should do more than lead to rampant mattress stuffing. Investors should now be more willing to seek the knowledge that will allow them to make more informed decisions. The bust knocked the wind out of the majority of individual investors. Many were forced into being cautious but all can use this new caution to their benefit.

Rather than abandon investing, now is the time to be fine tuning your investment strategy by getting back to the fundamentals. Rebalance your portfolio in a way that makes sense. Hold stocks in companies with good business models. Learn to make informed decisions. Demand transparency. Get in the habit of practicing prudent due diligence or search for an expert who you trust will. Instead of letting the fear of uncertainty keep you on the sidelines, analyze your risks, lower your uncertainty and reestablish your place on the field.  

Unleashing Small Business Horsepower

Small businesses have historically been the force that pulls our country out of tough economic times. Their ability to work more efficiently allows them to find innovative ways that spur job creation. But, without being able to find available capital, small businesses are restrained. A full recovery will not take hold until small businesses have access to adequate capital. The mega businesses have been propped up by the government, but small businesses heavily rely on the private-capital investments that are currently lacking.   

Investing in small businesses has many advantages. From a business stance, while larger corporations have strayed from their original initiatives, small businesses usually have focused business plans that detail their near-future commitments. Yet, small businesses still tend to be more flexible, which is a huge advantage considering the amount of ideas that small businesses produce. Without flexibility and the willingness to take educated risks, their ideas would have no Petri dish in which to grow. Another advantage is that small businesses usually carry less debt than large corporations; which use debt as a primary ingredient in their financial engineering. Less debt equals fewer obligations, and this can translate into quicker returns for investors.

No matter how simple or complex a small-business investment appears, it is important to always keep in mind a few basics. First, invest in small businesses that have solid business models that you believe in. Just because a company has filed with the state to sell its securities does not mean that the investment will be a success. Businesses succeed because of vision and follow-through. Remember that “publicly-traded” does not necessarily mean “better.” Second, do not let an employee of a company convince you that an investment is not risky, that is a lie. Companies will often have securities salespeople who work on a commission. This does not mean they are automatically corrupt, it just means do not let their promises replace your due diligence. Plus, investments ALWAYS carry some level of risk. Which brings me to my last point: Always carry through with proper risk analysis. There are registered investment advisors, lawyers and other financial professionals that can help take the headache out of the process. Do not pinch pennies early on in the investment process only to be burned later by a flaw that a professional could have identified and corrected.

These are terrific times for investing in small businesses. There are countless opportunities to invest your capital in quality projects that will produce high returns. With credit not rushing like it did before the bust, business owners are actively searching for ways to acquire capital. Our recovery will continue to look and feel like a false hope until small businesses have the means to expand, create jobs and put people back to work. 

Hanging on by a Home-Buyer Tax Credit

The $8,000 first-time homebuyer tax credit, included in the economic stimulus plan passed in February, is set to expire next month. The credit is widely touted as having given the stagnant housing industry its first sales jolt after a lengthy lull following the housing market’s implosion. Now, with legislation in recess, officials will be forced to scramble if they wish to extend the tax credit.

With a fast-approaching deadline of November 30^th, many in the real-estate and construction industries have their fingers crossed that an extension will be filed and keep buyers approaching the market. Last month, some groups, such as the National Association of Home Builders, even launched newspaper advertising campaigns pleading for the extension of the credit. Several members of Congress have either drafted bills or showed support for bills in favor of extending and expanding the home-buyer tax credit. U.S. Senator John Isakson (R-Ga.) introduced a bill that would extend the program through 2010 and increase the amount to $15,000. Also, Isakson’s version would be available to all homebuyers, regardless of current ownership status or income level (the current tax credit is limited to first timers who make under $75,000 annually).

Nearly everyone agrees that the residential housing industry has been using the first-time homebuyer tax credit as a crutch; and therefore has managed to stay on its feet. However, not everyone agrees the tax credit should be extended. While many experts worry how the housing industry will fair when the tax credit expires, they also agree that a true housing-market recovery will be delayed until natural economic forces replace government support. Outside of the tax credit, the government currently provides support to home buyers in multiple ways. While attempting to thaw the credit freeze, the Fed has kept the interest rate at or around zero. This encourages lending, which includes home mortgages. Also, the current tax code already shows great support for home ownership by providing incentives such as deducting the interest on your mortgage.

A number of senators have been criticized that they support an extension because it would favor their states heavily. While this may be true for those states that have been badly bruised by the housing implosion, an extension is likely to benefit real-estate markets across the country. The general consensus is that extending the tax credit would continue to encourage buyers to explore the market. But, passing an extension depends on Congress giving attention to the matter before the November 30^th deadline—for there is no shortage of higher-profile issues waiting to be addressed in September and October.  

All My Best,

Thomas J. Powell 

Tags: bail-out, credits, debt, ELP Capital, Fed, financial engineering, home-buyer tax credit, housing market, Investing, meltdown, mortgage, provate capital, real estate investments, recession, Recovery, risk economy, small business, speculation, stimulis, stock market, tax credit, Thomas J. Powell, tom powell

Comments feed (RSS 2.0), comment or trackback from your site.

RCM Comment – Gary Rosenthal:

Examine the Total Credit Market Debt vs. GDP chart below and you will quickly realize why all of the government’s bailout programs are paper tigers and are destined to miss their intended mark by a wide margin. The credit collapse of 1929-30 did not hit bottom until the early 1950s. The strong U.S. economic expansion from the early 1980s until recently was driven by an extraordinary rapid climb in the amount of debt per dollar of GDP. At its peak in 2008 total debt per dollar of GDP was dramatically higher than the peak of 1929-30. In a single snapshot you can see that the U.S. consumer has completely lost his credit worthiness at a time when the banking system has regained its sanity and adopted lending standards not seen since the 1950s and ’60s. In short, until U.S. consumers substantially repair their balance sheets (through savings or bankruptcy) consumer expenditures (and in turn the U.S economy) are likely to be on a downward spiral for an extended period of time no matter what the government tries to do. No amount of government spending will offset the vicious cycle of a collapse in consumer spending and rising unemployment.

The government’s misguided Keynesian answer to declining tax revenues is sharply accelerated spending, unprecedented budget deficits and borrowing and higher taxes. Common sense would tell you that something is completely out of whack with this formula. Who would lend money indefinitely to a government who has completely lost control of fiscal responsibility? The answer is that eventually no one. Thus this program of uncommon sense will eventually be largely funded by the printing press until the U.S Dollar loses its role as a reserve currency with our trading partners. How long will it take the Dollar to lose its place in international finance is anybody’s guess, but the next time gold goes through $1000/ounce it is very unlikely to come back.

MISH’S Global EconomicTrend Analysis:

The chart below from Ned Davis illustrates the real problem: An explosion of debt relative to GDP. In Geithner’s plan, this debt won’t disappear. It will just be passed from banks to taxpayers, where it will sit until the government finally admits that a major portion of it will never be paid back.

Total Credit Market Debt vs. GDP

The above chart is similar to those detailed in Fiat World Mathematical Model. Here is the ending snip on psychology that is at the heart of the matter.

Political Will vs. Consumer Psychology

What happens next depends somewhat on the political will of the central banks and politicians. However, it depends more on the psychology of the borrowers. If consumers and businesses refuse to spend and instead pay back debts (or default on them along with rising unemployment), the picture simply is not inflationary, at least to any significant decree.

The credit bubble that just popped exceeded that preceding the great depression, not just in the US but worldwide. Thus, it is unrealistic to expect the deflationary bust to be anything other than the biggest bust in history. Those looking for hyperinflation or even strong inflation in light of the above, are simply looking at the wrong model.

At some point the market value of credit will start expanding again, but that is likely further down the road, and weaker in scope than most think.
Henry Blodget’s Five Misconceptions are another way of looking at the psychology of the situation. The sad reality is that both Geithner and Bernanke are trapped in academic wonderland with failed models about what happened in the Great Depression and why.

Geithner said “Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.” I agree. Unfortunately, Geithner’s solution is to Zombify the taxpayer instead. What needs to happen is for banks to write off the bad debts. The Fed pleaded with Japan to do just that. Now Bernanke and Geithner refuse to follow that advice.

Bear in mind this insanity is just round 1. When it does not spur lending for reasons stated above, Geithner will be back at it begging for more taxpayer funds to bailout the banks. By the way, is this even legal? Offering no collateral loans is a handout. Many on the Fed, including Bernanke have stated the Fed can provide liquidity not capital. What is a no-recourse loan but capital? Of course the Fed is offering these guarantees via the FDIC.

Tags: debt, Dollar, GDP, gold

Comments feed (RSS 2.0), comment or trackback from your site.

RCM Comments: With all the noise about bailouts and payouts and market rallies, I’m afraid you may be distracted from perhaps the most important story brewing. We have highlighted in these pages more than once over the last few months the importance of the movement coming from China to impose its will on the world financial community. Please read these two stories closely. A move away from the US$ as the reserve currency will be destructive for the value of the US$ and US treasury bonds prices as well as bullish for gold prices.

China takes aim at dollar – WSJ
The Wall Street Journal reports China called for the creation of a new currency to eventually replace the dollar as the world’s standard, proposing a sweeping overhaul of global finance that reflects developing nations’ growing unhappiness with the U.S. role in the world economy. The unusual proposal, made by central bank governor Zhou Xiaochuan in an essay released Monday in Beijing, is part of China’s increasingly assertive approach to shaping the global response to the financial crisis. Mr. Zhou’s proposal comes amid preparations for a summit of the world’s industrial and developing nations, the Group of 20, in London next week. At past such meetings, developed nations have criticized China’s economic and currency policies. This time, China is on the offensive, backed by other emerging economies such as Russia in making clear they want a global economic order less dominated by the U.S. and other wealthy nations. However, the technical and political hurdles to implementing China’s recommendation are enormous, so even if backed by other nations, the proposal is unlikely to change the dollar’s role in the short term. Central banks around the world hold more U.S. dollars and dollar securities than they do assets denominated in any other individual foreign currency. Such reserves can be used to stabilize the value of the central banks’ domestic currencies. John Lipsky, the IMF’s deputy managing director, said the Chinese proposal should be treated seriously. “It reflects officials’ concerns about improving the stability of the financial system,” he said. “It’s interesting because of China’s unique position, and because the governor put it in a measured and considered way.”

Official says China to continue buying U.S. debt : AP reports China will continue buying U.S. government debt while paying close attention to possible fluctuations in the value of those assets, a vice governor of Beijing’s central bank said Monday. Investing in U.S. Treasury bills is ”an important component part of China’s foreign currency reserve investments,” People’s Bank of China Vice Governor Hu Xiaolian said at a news conference on Monday. ”So as an important component we are naturally relatively concerned with the safety and profitability of U.S. government bonds,” Hu said — a statement apparently aimed at concerns that rising debt to fund Washington’s stimulus package could spur inflation and weaken the dollar.

Tags: China, debt, US Reserve, US$

Comments feed (RSS 2.0), comment or trackback from your site.