Saturday, May 2, 2009

Where Would A Tuna Swim In This Ocean?

**** I am not a financial advisor, please consult with one before making any investment decisions ****

Over the past 20 years we have seen an explosive growth in our money supply. This has been due to the highly inflationary nature of Alan Greenspan and Ben Bernanke, our last two Federal Reserve Chairmen.

During this 20 year period, we have seen a relatively stable growth in the cost of goods such as food, gas, living. (rents) The reason for this is because when the Fed creates money, it is impossible for them to control where that money will go.

In the 1990's the money went into the stock market. This caused an asset bubble bringing the NASDAQ from 300 to 5000 in just a short number of years. Following the bursting of this bubble, the Fed pumped an enormous amount of new money into the system. Money then moved from the stock market into the real estate market creating a new bubble. That bubble is still in the process of bursting due to the fact that it takes real estate longer to fall because it is a less liquid market.

The bursting of the real estate bubble brought on the financial crisis we experienced last fall as every major bank in our country went insolvent almost overnight. This shock wave that rippled through the global economy is the cause of the massive instability in the world we live in today.

In response to this event the Fed once again pumped an enormous amount of liquidity into the system, and they are still injecting liquidity in a way that can only be described as biblical.

The following chart show the recent growth in M3, which measures the total money supply:

The most important question you can ask yourself today is where do you think this new ocean of money will ultimately find a home? Which new asset class will become the new beneficiary of this ocean of currency?

In the fall, during the crisis, money moved out of the stock market, real estate market, and commodities, and it moved into American treasuries, American cash, and gold. These investments were considered the ultimate form of safety and money rushed toward them during the panic.

That has changed over the past few weeks as money has begun to move back into the stock market creating the explosive rally we've seen since mid March.

The question is, will it stay there? Where will it go from here? I'm going to do something I have not done up to this point, and show you where I think money will go, and if I was betting (I am) where I would put money to work:

There are two ways to make money in the market. If you think money is leaving a sector to move somewhere else, you can short that sector to profit from its departure. For example:

1. TBT - This exchange traded fund shorts long term treasuries. I believe money will be leaving the treasury market and this fund goes up in value if that happens.

2. SRS - This exchange traded fund shorts commercial real estate. I believe money will be leaving this sector as well. This fund moves up in value if commercial real estate falls.

The second strategy is to decide where the money will go when it moves to a new location. I personally believe that location is going to be commodities.

3. GDX - This fund invests in a basket of the top gold mining stocks. If gold increases in price, the miners generate greater profits and their stock prices will benefit.

4. Silver - I have discussed in the past the opportunities that will present themselves to silver investors. Another way to profit from its price rising, similar to gold, is to own mining companies that focus on silver. The following are my favorite three:

5. PAAS - Pan American Silver (Mining)

6. SLW - Silver Wheaton (Mining)

7. SSRI - Silver Standard (Mining)

8. DBA - This fund invests in a basket of agriculture. I believe agriculture will be an area money will gravitate to over the next few years.

9. OIH - This fund invests in a basket of oil service providers. I believe there is an oil shortage approaching in the not to distant future. Oil service companies will continue to see greater profits as oil prices rise.

To summarize, there is an ocean of money awash in the world right now looking for a home. I personally believe money in general will leave the stock market, real estate, bonds, and cash. I think this money will find its way into commodities and at some point down the road will form the next great super bubble.

Sunday, April 26, 2009

The Credit Card Dilema

Over the past few years credit card companies have increased their business tremendously. These companies would relentlessly send out cards in the mail with a letter saying you have been pre-qualified and all you have to do is go to the store and start spending.

As these cards turned on the debt started to build. To make way for new loans the credit card companies sent their debt to Wall Street banks. These banks packaged up the debt, put a AAA credit rating on it, and sold it to investors around the world. (This is the same process they used for mortgage loans)

Then, just like mortgage loans, investors stopped purchasing the debt. If investors stopped purchasing the debt, then Wall Street was unable to buy the debt. If Wall Street was unable to buy the debt, then the credit card companies would have to keep the debt on their own books. This is not a problem, the companies just have to be a lot more careful now who they send the cards to. If the debt goes bad, then the losses are on their books.

Recently, the losses have started to build. In order to compensate for the increase in defaults the companies have started to increase fees across the board. Similar to an insurance company who insures homes down in Florida, in order for them to stay in business they have to charge higher fees knowing the likelihood of losses is high.

This week the government has stepped in and announced they will not let these companies raise their fees. They claim it is unfair to the American public who took the free money, spent it, and can't pay it back. The government thinks that with the fear taken away of these higher interest payments, Americans will keep on spending.

Unfortunately, it will have the reverse effect. If credit card companies cannot charge these higher fees to offset losses, they will just stop lending across the board.

Their is a third part to this story, however, and its role will begin to grow as this tale unfolds. In order to induce these credit companies to begin lending again, the Federal Reserve has begun purchasing credit card debt. They have now become the secondary market that existed before.

With the fear of defaults once again taken away, the credit card companies will be able to make loans to any willing American who will turn on a card. If the losses go bad, then it will happen on the Fed's balance sheet.

I hope it is obvious that this scenario has the ultimate recipe for disaster. You cannot just paper over losses will printed money. With the public looking one direction at the discussion over fees being charged, they are missing the real story happening out back as these loans are being offloaded to the Fed.