Saturday, November 1, 2008

The Bull Has Now Grown Stronger

We are currently in a long term secular bull market for commodities, and we are currently in the mist of a short term violent pull back that has provided a gut check for long term investors. This pull back has come due to two main factors:

1. Dollar Strength - As previously discussed in detail, the current deleveraging process has forced investors into cash causing a vicious spike upward in the dollar

2. Credit Crisis - Also discussed in length has been the effect of hedge funds managers needing to sell anything and everything right now to stay alive. There is always a market for commodities, unlike mortgage securities, and they have sold off their good assets to stay alive.

What we have not talked about is how this affects the look of this secular bull market moving forward. I think the recent sell-off has presented unbelievable buying opportunities. There are two main reasons for this:

1. The Dollar - To respond to this crisis, Ben Bernanke has more than lived up to the name "helicopter" as he has dumped money from the sky. This is only his opening act, however, and the amount of money he will inject by the time it's over will be staggering. This would be bad enough alone, but he has a US government working along his side with their massively destructive bailouts. These two together have set the stage for the final collapse of our currency, which will have the reverse effect on commodities that you are seeing today.

(It's interesting to note right now that as the dollar continues to climb, all the major commercial banks have begun taking enormous short positions against it.)

2. Supply - As prices fall for commodities it becomes both unattractive and in some cases impossible for producers to supply new product. They cannot produce goods at a profit and will shut down operations. Global production of lead, zinc, and copper for example have seen tremendous recent declines. This decline is coming at a time when inventory levels for commodities across the board are at historic lows. Normally it is the exact opposite; inventory levels will be high to cause a price decline like we've seen.

These two factors are creating a perfect storm for the next leg up in this market. As all the dollars currently being created make their way into the system and foreigners finally cut off the lending binge to our country, the dollar will collapse and the currencies of the rest of the world will simultaneously rise. No longer having to pay for our consumption, they will now be allowed to use that capital, and their newly strengthened currency, to continue their industrial explosion.

This will come at a time when there are no inventories and production has been crushed. This will be horrifying for our country in terms of oil. Every day prices remain low, alternative solutions get pushed to the background and our leaders focus on other issues. By this time next year you'll begin to see the true oil crisis for America. The same will be true for agriculture and water on a global scale, as the fight for resources will have begun.

Friday, October 31, 2008

The New Housing Miracle Program

A few weeks ago our Treasury Secretary Henry Paulson decided to send the 9 major banks, or should I say all of his friends on Wall Street, $125 Billion. Paulson is the former CEO of Goldman Sacs and has close ties with all current banking leaders. (Coincidental, his political term will also be ending in a few weeks, and he'll be back out looking for a new job.)

While this was in no way part of the original plan to use the $700 Billion recently granted by Congress, Paulson assured them and the American people that it was necessary to get banks lending again to strapped homeowners. What did the banks immediately do with the money? They used it to pay dividends, add cash to their balance sheets, and make sure there was enough bonus money for the CEOs.

Shocker.

When the American public realized this had happened, Paulson then announced he'll be sending another $125 to the smaller banks around the country to get THEM to lend to homeowners. Of course, the smaller banks will do the same thing as the larger banks.

So this week we now have the answer. There is now a new plan in place to send money directly to struggling homeowners. What the government will now do is renegotiate current loans that are not being paid. The cost for this has been estimated in the $600 Billion range. This is being sold as a benefit to the entire country, because of course, if a home is falling in price on your street it directly impacts the value of your home. Here is what really will happen:

1. Recent estimates show that about 30% of homes today have mortgages greater than the current value of their home. (That may be a low estimate) The majority of those thirty percent, for some crazy reason, are still making their payments every month. With the new government program, their next door neighbor who is no longer making his payments will now be able to go to the bank and renegotiate his loan amount with government assistance. So, anyone who is not a complete fool will then stop making their mortgage payments so they too can renegotiate the value of their mortgage.

2. This will cause a new flood of foreclosures to enter the market. There is already a flood coming based on the number of people that will soon lose their jobs, and the Alt-A loans that will reset over the next 24 months, but now it will be a tsunami.

3. The money now needed to renegotiate all the new foreclosures will skyrocket. This will put the original $600 Billion in the $1-$2 Trillion range.

4. In many cases where the government cannot cover the full cost of the the debt, they will just change the value of mortgage. This will be violating contract law, and any foreigner still stupid enough to throw money away on American mortgages will now be scared away completely.

5. This will pave the way for the new lender of last resort, Fannie Mae and Freddie Mac. They will now issue all new loans to homeowners. As Americans continue to default on those loans, the losses will be borne by the government, or the American people through increased taxes or inflation.

6. The $1-$2 Trillion needed to renegotiate loans will be printed as well, moving us one step closer toward hyperinflation.

For a real life look at where our country is headed, take a look at the following article:

http://www.boncherry.com/blog/2008/10/26/global-crisis-this-is-the-real-crisis/
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Wednesday, October 29, 2008

A Lesson Easily Forgotten

Over the past few years as America's home values have plummeted, credit markets have frozen, stocks have plunged, and job layoffs have surged, people have constantly looked back and tried to figure out what put us here.

The general consensus was that bringing interest rates down to an unbelievably low rate of 1% in 2002 and holding them there was a direct cause of the banks malinvestments that led directly to our housing bubble. It was said at the time that the interest rates cuts were necessary to protect us from the recession of 2001 as the tech bubble burst.

Now, as we are deep in the painful process of suffering through the horrible monetary mistakes of Alan Greenspan, we receive word today that the Fed today has decided to cut rates down to 1%.

Wow. Not only are people not surprised, but many are calling for additional rate cuts, possibly down to 0%. We "need" to be saved from the current recession that is taking place now. No one takes about the effects of this current free money down the road, and for some reason it appears that they are now forgetting why we are in this trouble in the first place.

When the Fed cut rates down to 1% in 2002, they were trying to re-inflate the recently burst stock market bubble. In doing this they accidentally blew up the real estate bubble. Now that that bubble has burst the new 1% interest rate has now been put into effect to try and re-inflate the recently popped real estate bubble. Unfortunately, it is not working this time either, so where will this money blow up the next bubble? That is the trillion dollar question.

Tuesday, October 28, 2008

Silly Season

The dollar index has officially gone parabolic to the upside. Since the middle of July its rise upward has been breathtaking.




It reminds of a movie when someone you think is finally dead all the sudden rises up for one last great moment before their spectacular death. Look at that chart, incredible. When will the dollar stop rising? Who knows.

Investors right now are running scared and their natural instinct is to run toward the United States currency, specifically short term US treasury bonds. No one has told them that the reason we are having all of the problems right now is because of the United States. It is similar to a bomb going off and people running toward the fire. Many investors who were sitting in the frying pan have now jumped out and are sitting in the flames.

Every day the dollar rises should be a day to cheer. It provides one last great opportunity to get out of the currency for some lucky investor, giving them the opportunity to buy a new asset at a better value. It is similar to someone buying your home right now. You don't ask them why they are buying it. You don't ask them if they've turned on the news or if they know they're about to lose a lot of money. You just graciously except that they have taken that burden off your hands.

That's what has happened recently. Commodities and foreign stocks (especially foreign currencies) are priced right now at fire sale prices. If you were to go back to mid July and write down on a piece of paper the worst possible thing our leaders could have done for our currency, I don't think you could have even imagined it to be this bad. And we're just getting warmed up.

What we're experiencing right now is an anomaly in financial history. In 1999 people bought Pets.com for $200 a share with the company having no possible way of earning money. In 2006 people bought 6 condos at a time in Miami with no money down, expecting to retire off their profits. Around those times people start to think, maybe it's different this time. Maybe if the Fed prints trillions of dollars, the government nationalizes all the banks that are insolvent, and runs a $2 Trillion dollar deficit this year.....Then maybe that is bullish for our currency.

Cheer every rise in the dollar. That means there are people willing to overpay for your currency right now. Cheer someone who would be willing to buy your home. Cheer every fall in gold, oil, agriculture, and the Australian dollar. The people buying the fire sale assets now are the ones that are going to have a story to tell in a few years. People are going to look back and wonder how someone could buy a 10 year treasury bond yielding 3.87%, and not buy a Canadian oil company yielding 13%. They'll look at it as clearly as we look now at Pets.com.

Monday, October 27, 2008

History Repeats and Gravity Pulls

A fiat currency means it is backed by nothing. In 1971, president Nixon took the US Dollar off the gold standard. This meant that the dollar was now backed by nothing and its value was determined based on its strength against the other world currencies.

This is not the first time it has happened throughout history. The following are just a few examples:

In A.D. 218, the Romans took silver away from the Denari as backing for its currency. Its value soon went to zero and they saw hyperinflation.

In France in 1715, King Louis XV took gold and silver away as backing, and the country soon experienced hyperinflation and it turned the country into ruins.

In Germany in 1922, the government turned on the printing presses in a similar fashion to what is being seen today in our country. They experienced a horrific hyperinflation where people were burning their money in order to stay warm. This chaos opened the door to a radical new form of leadership; Adolf Hitler.

All throughout history countries have taken their currencies off the gold/silver standard knowing that "this time it will be different." Do you know how many times a fiat currency has survived throughout history? Zero. Never. Its value has always gone to zero.

Of course, this could never happen in the United States, right? It has already happened twice.

Our first paper money was the Colonial back in 1690. As all the colonies started to print their currencies with no commodities to back it, the colonials value went to zero.

The next chance came during the revolutionary war when the country issued continentals to pay for the war. Does that sound familiar? Its value went to zero, and America went back to a gold standard until 1971.

I believe it is important to study the past in order to help understand the future. We are currently on the path toward hyperinflation. Based on the actions our leaders are pursuing, our currency is heading toward a value of zero.

That is such a radical thought people easily dismiss it as nonsense. But why? What economic reason does printing trillions of dollars in America not ultimately devalue the currency? Why is it different this time? Just because we don't want it to be?

Think about it this way; If the value of the currency strenghtens and you are in debt, you have to work harder to pay off that debt. (The debt becomes more valuable) If the value of the currency weakens, it is easier to pay off that debt with dollars that are worth less.

Right now we owe the rest of the world about $8 Trillion. It is in the government's best interest to devalue that debt, as long as it is a slow decline and not a rush to the exits. At the same time, however, it brutally punishes people on fixed incomes that are saving dollars for retirement. They feel themselves getting poorer, but they cannot understand why.

Here's another interesting question: Why did the government recently raise the FDIC insured limit to $250,000 from $100,000?

The reason is because they did not have the ability to cover the $100,000. If you can understand that, you can understand what is happening in the world right now.
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Sunday, October 26, 2008

Website Updates

I've added a new feature to the website at the bottom of the page called "Recent Videos." I come across many videos online, and I'll start to post some of the ones that are relevant to the market views expressed here.

I've also posted a recommended reading list. I try to read a book a week on business and investing, and about 2 or 3 a year set themselves apart from the rest. I'll let you know when I come across them.

I read countless articles online as well, and I've been posting some of the ones recently that I think are important on the "Additional Reading" in the emails.

I guess a good question at this point would be, why would a 26 year old spend so much time studying the markets, reading books, and taking courses. Unless I manage a trust fund or work as a financial analyst, isn't it just a waste of my time?

I don't think so, and I could give you a ton of reasons why, but here's a simple one:

Let's say I'm driving down the road and I see an apartment complex that looks nice. I decide to pull in and ask the property manager if they have the owner's contact information. She does, and I give him a call that afternoon. I let him know that I just drove by his building and felt that it is something I may like to buy. He is an older gentleman, approaching 70, and says that he has owned the building for 20 years and was thinking about selling it.

I then ask for the financial information to determine what the building is worth. I determine that the building is worth $5 million and tell him I'll give him full price if he will seller finance the building to me at a 7% interest rate. He says he is not comfortable doing that and would rather just sell the building and collect the money.

Here's where it becomes important to understand the markets.

If he sells his building, after paying a realtor, depreciation, and taxes, he will probably come away with about $2.5 million. So what is he going to do with the money then? I tell him that the stock market is crashing right now and explain to him why it is a dangerous place to put his money. How about bonds? Bonds are even worse because he is getting a negative real return after inflation and I explain to him how the bond market is in a bubble right now. So he can put it in a money market that may return 3% at the current rates.

What is 3% on $2.5 million? $75,000 per year or $6,250 per month
What is 7% on $5 million? $350,000 per year or $29,166 per month

What if I could not argue why 7% was a great investment for him? What if I could not sell him on the fact that he was getting a deal and I had to give him 9% per year. That is an additional $100,000 per year that I would have to pay him in interest, which means it is $100,000 per year that I would not be collecting in profit.

How about one more reason for fun.

Let's say that gentleman wanted $100,000 down as a deposit on the building. What if I did not have any money? I could go to a private investor and ask him for $100,000 and tell him I will pay him 15% on his investment. I would need to sell him on giving me the money as a better investment than anything else that is currently available to him.
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