Stock Market Investing: No change from last week. The technicals didn’t get much better but an overwhelming tsunami of weak economic data helped to drive the US$ lower and drove both hard asset prices and equity prices higher.Read More…

…Meanwhile, even as Brazil implements policy changes to stop its currency from appreciating, the Real advances adding credence to the Economist theory of a Forex crisis approaching …Read More…

Investment Strategy: Ride the wave! This market behavior reminds me of the waters off Jupiter Beach, FL, where I live. Right now I’m looking at a beautiful expanse of ocean as far as the eye can see (don’t hate the player, hate the game) and I see perfect 5ft. rollers washing up on shore. The break is speckled with surfers all the way down to Juno Beach pier where the best are attacking the biggest swells.

The picture seems perfect but the key word from the description above is ATTACKING. I sat through brunch on Sunday next to a local surfer girl. She was around 16 and had everything going for her with the tiny exception of crutches and a rather large bandage on her foot.

While the surf was perfect for humans, it was also an absolute delight for the sharks. Do you see where I’m going with this? When investing in today’s markets you can enjoy the ride but you better remember the sharks are circling.

Time to review the details from last week. Follow the bouncing ball and you will get to the inevitable conclusion that hyperinflation is raging toward us like a Hammerhead that smells blood….

Fed’s Fisher says Q3 US GDP growth probably not quite as robust as originally reported, closer to 2.5% – Reuters

November University of Michigan-prelim 66.0 vs 71.0 consensus, October 70.6

Initial Claims Continue to Fall
Initial claims again beat consensus estimates as claims fell from 514,000 new claims to 502,000 for the week ending Nov. 7. While the drop in claims doesn’t represent a clear turning point, for the second consecutive week claims have fallen below the 520,000 to 550,000 range that it seems to have been stuck at during the previous month. The market is going to take the drop as a sign that the labor sector is beginning to turn around, but we’ve seen a similar decline in claims before when initial claims fell below the 550,000 threshold at the end of September…

The drop in continuing claims was not due to workers finding new jobs, but due to people running out of unemployment benefits. Approximately, 7,000 unemployed workers lost their benefits every day. Congress recently passed an extension of the unemployment benefits that gave all unemployed workers an additional 14 weeks of unemployment insurance payment and an additional six weeks to workers that live in states where the unemployment rate is above 8.5%. Obama signed the extension into law on Nov. 6. The extension will stop the downward trend in continuing claims…

More workers are still losing their jobs than finding new ones and we expect the data to show a slight uptick in unemployed workers over the next three months. Due to timing of the releases, the data will not show the results of the unemployment extension until the Nov. 25 release. This means that the continuing claims numbers will show a decline in next week’s reported numbers.

…The details above represent “blood in the water” that requires the Fed to remain easy. However, these policies that balloon money supply have fueled the decline in the value of the US$. I have written volumes about this vicious cycle. For the sake of new readers I will repeat the RCM mantra: Hyperinflation is a currency event not an economic event.

I am forever baffled by the ignorance of many financial commentators when asked about inflation. They point to economic troubles and scoff at the very idea of inflation but applaud Fed policy and cheer rapidly inflating asset prices. Do they not see the oxymoron? Or are they simply morons? (OK, true that was trite and a little unfair but it couldn’t be helped.)

Hyperinflation is rapidly spreading worldwide because currencies around the globe are being devalued in an effort to keep up with the Bernanke “helicopter” drops of US$. The world is heading toward a Forex crisis as the Economist article below suggests. Our response to this roller coaster: Please hold on to the (GOLD) bar…

The Economist on Gold and Forex:

Developed-country governments have attempted to control bond yields through quantitative easing and to support stockmarkets through ultra-low interest rates. But they cannot support their currencies as well without risking problems in the bond and equity markets. Gold’s surge may indicate that investors fear the next stage of the crisis will occur in the foreign-exchange markets.

Brazil’s real is up 1.1 percent against the dollar this month, even after imposing a tax in October on foreign stock and bond investments and increasing foreign reserves by $9.5 billion in October in an effort to curb the currency’s appreciation. The real has risen 33 percent this year.

…As you can see, the march toward hyperinflation and perhaps a currency crisis seems inevitable. The best defense: Precious metals, Gold & Silver. A note of caution: Make sure your precious investment is backed by the actual metal. More on that topic next time…

Tags: ben bernanke, Brazil, Dollar, Fed, forex, GDP, gold, hyperinflation, investment strategy, obama, precious metals, silver, stock market investing, US$

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              Inflation concerns have been on economists’ minds since the Fed started passing drastic measures to combat our country’s troubled economy. Now, as the worst of the storm appears to be behind us, the concerns about the repercussions of our government’s monetary actions are under the microscope. The Fed’s commitment to keep the interest rate near zero for the next year has fueled speculation that other central banks will raise interest rates first—which would make other currencies more attractive than the dollar. Australia’s decision last week to raise interest rates already hurt the dollar and suggested that resource-based economies might recover quicker, and be more attractive to investors, than the United States. 

 The V-Shaped Climb 

              As manufacturing gains its footing, the stock market strengthens, housing inventories fall and retail spending returns; our economy will continue traveling up the V. However, government provides the stability in many market rebounds.  Once government funds are pulled back, the likelihood of dropping back into a recession could increase.

              Until spending is once again a consumer behavior, instead of a government one, the underlying economic problems will remain—threatening to pull us into another deep recession. In order for consumers to spend again, they are going to need to be convinced that their hours will not be cut, their jobs will not be lost and their wages will not be dropped. Of course, before they can be convinced of any of this, the unemployed will have to be reintroduced into the workforce. 

              We will continue wrestling with high unemployment numbers until business owners are confident that their products and services are once again in demand. Currently, businesses are getting by with nearly-depleted inventories. But, as consumer demand rises, business owners will beef up inventories; which will produce the need for more employees in the manufacturing industry. Business owners are scraping by with the bare-minimum number of employees. Larger inventories require new employees to sell, stock, ship and manage the products. 

              So, as consumer demand slowly returns, so too will new jobs. As we crawl out of this recession, a number of positive signs fuel consumer demand. As home prices continue to rise, homeowners will no longer be underwater and their confidence will get a boost. As the stock market continues to climb, so too will investors’ confidence. Major markets are all interrelated. Signs of growth in one market have the ability to positively impact another. The process is slow and filled with pockets of discomfort, but the climb has begun and the journey is forecasted to be slow and steady. Being patient and taking the right steps now will help our economy avoid falling down the second trap in the dreaded W-shaped recovery.  

Protecting Your Wimpy Dollar, Not Fearing it 

              Fearing inflation is a reactive investor’s behavior. This group of investors waits until something drastic happens in the marketplace that demands they respond. Active investors prefer to take more proactive measures to prepare for unappealing market conditions, such as inflation. Wise investors salt the slugs of inflation long before they have the chance to take over their gardens and devalue their investments.

              First, let us be clear that our country still may be on track to side step a nasty bout of hyper-inflation; which could cause a gallon of milk to cost a truckload of fifties. Our policy makers have to make the right decisions as we trudge through this recovery. To recognize the silver lining, an economy needs to have ultra-low unemployment levels and rising wages to effectively foster a period of hyper-inflation—both of which we are lacking at the moment. Unemployment is flirting with the 10-percent mark and real average hourly wages fell from December, when they were at their recent high point, to August at a seasonally-adjusted 1.5 percent.[1]

              Some may consider worries about inflation to be premature, but there are countless signs suggesting that the dollar will continue to considerably weaken over the next couple of years. The most concerning: Our government has borrowed hundreds of billions of dollars in efforts to hold up our banking system and this has added to our country’s already-enormous debt responsibilities. Having far too much money and too few goods is the root cause of inflation. Therefore, the biggest worry is that our government will continue to print money to pay for its extraordinary debt. Even if some experts are arguing that inflation concerns are premature, there are proactive actions an investor can take to protect his or her investments.

              Some assets rise in value during times of inflation and having a dose of them in your investment portfolio can do wonders for its performance. The following are widely-considered to be the best performers:  

·      Real estate: Traditionally, investors have used real estate as a hedge against the spontaneous performance of portfolios that are overloaded with stocks and bonds. Real-estate assets can also act as a hedge against inflation. Plus, today’s affordable prices and availability have real estate looking extremely appealing as an investment opportunity.

·      Commodities: Inflation causes the price of materials to rise. So, why not hold interest in the materials themselves? Investing in commodities through exchange-traded funds can help small investors avoid the many drawbacks that come with investing in commodities (like deciding where to store 1,000 barrels of oil).

·      Gold: With our currency no longer anchored to gold, it can lose value—and often does. The magic with gold is that it often moves opposite the value of the U.S. dollar.

·      TIPS: Treasury Inflation-Protected Securities are similar to other Treasury securities in that they are long-term IOUs that pay a fixed rate of interest until they mature. But, with TIPS, the government adjusts the payments up or down each month according to inflation levels.  

All My Best, 

Thomas J. Powell 

The discussion of investment strategies in this article should not be considered an offer to buy or sell any investment. As always, consult an investment professional to assist you in meeting your investment goals.

[1] See http://www.bls.gov/news.release/realer.nr0.htm

Tags: 10 percent, central banks, commodities, consumer spending, credit streams, Dollar, gold, hedge, hyper-inflation, Inflation, inventories, IOUs, Real estate, Recovery, TIPS, tips for hedging inflation, trade deficit, unemployment, weak dollar, wise investors

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As the graph above illustrates, a serious correlation between the US$ and the US equity markets has developed over the last 9+ years. This correlation is strong and for policy makers in Washington, rather disturbing. The relationship is as follows: If the US$ loses value the equity markets have rallied and if the US$ strengthens equity markets have sold off.

A hint as to the future direction of the US equity markets may reside in the chart above. If this strong correlation continues than any insight into the future strength or weakness of the Greenback could be helpful when managing a U.S. equity portfolio.

To that end, I offer the following story about the relationship between the US$ and the Japanese Yen. The Japanese economy has for years (decades in fact) been the poster child for failed socialist economic policies and as a result their interest rates have been the lowest of any major country in an effort to stimulate growth. Unfortunately, the socialist policies have overwhelmed the fiscal stimulus and a stagnation has resulted.

This stagnation has led to a very profitable trade for hedge funds over the years called the Yen carry trade. Simply put: with rates in Japan so low, an investor could borrow Yen, sell the Yen to buy the currency of another nation and use the currency to buy that nation’s government debt. As long as interest rates in that other nation were higher than in Japan the investor could profit on the spread between the cost to borrow Yen (tiny) and interest paid on the other nation’s debt (larger than tiny). Of course, a side effect of this trade would be the strengthening of the other nation’s currency and a major bid for said nation’s debt.

I believe the story below could be the proverbial “straw” that breaks the back of the US$. The US$ is fighting to maintain support above the crucial 80 level and avoid selling off to the lows of early 2008. The battle is in the process of being lost as the US$ sits at the 78 level as of this writing.

As the story below explains, the US$ is now cheaper to borrow than the Yen. The implications of this reversal could be enormous:

• A major leg of support for the US$ in the form of carry traders has vanished
• A major leg of support for the US treasury markets in the form of carry traders has vanished
• Could the carry trade begin to work in the reverse? Borrow and sell US$ to buy another nation’s currency and debt? This action, of course, would add even more pressure to a falling US$

The US$ is already under attack on many different fronts from increased government spending to seemingly endless treasury debt offerings to the Feds decision to monetize said debt. Will the loss of the carry trade support – or worse, a new reverse carry trade – lead to the real collapse in the US$? Only time will tell, but all signs point to trouble for the Greenback. This trouble could result in further upside for the equity markets as inflation becomes a reality and investors flee cash for high growth assets and commodities.

Dollar is now cheaper to borrow than yen – WSJ
WSJ reports the dollar officially became cheaper to borrow than the conspicuously low-yielding yen for the first time in more than 16 years. That doesn’t bode well for the U.S. currency, some analysts said.

The dollar has long benefited from positive yield premiums, especially against the Japanese currency, but the prospect of the Federal Reserve keeping U.S. overnight interest rates essentially at zero until at least late next year has wiped out the dollar’s premium. That means less incentive for investors to park funds in dollar assets for the relative yield advantage, or “carry.”

Tags: AIG, carry trade, Dollar, financials, greenback, libor, momentum, short squeeze, yen

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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

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