Friday, May 22, 2009

Video

Peter Schiff takes some time on Friday to try and educate the talking heads on CNBC.

Thursday, May 21, 2009

The Campfire

Imagine you are sitting at an enormous campfire known as the American economy. You're sitting with two gentlemen you are probably familiar with, Barack Obama and Ben Bernanke. Next to them are two gasoline canisters.

Imagine that one part of the fire begins to burn out. This part of the fire is know as Fannie Mae and Freddie Mac. They quickly pick up their gasoline and dump it on the fire bringing them back to life.

Another part of the fire begins to burn out, Bank of America. They quickly pick up their gasoline and dump it on bank of America. The bank comes roaring back to life.

Then other parts of the campfire begin to run into problems:

-J.P. Morgan....more gasoline
-General Motors.....more gasoline
-California.....more gasoline
-A.I.G......more gasoline
-Ford Motors.....more gasoline

Any part of the economy can be brought back to life. If the American people need help, the government can cut their taxes and even send them checks in the mail. If the treasury bond market starts to fall they can buy treasury bonds. If the stock market falls they can buy stocks.

There is nothing they cannot do. There is no problem they cannot solve with additional gasoline. The gasoline is the equivalent of printing money to bring all these problems back to life.

But what if something else happened?

What if the fire somehow spilled over the campfire walls and caught a portion of the grass on fire? What if that portion of grass then started to spread and grow?

This scenario is the equivalent of the value of the American currency falling.

Please understand this, and let it sink in for a moment.......

If the American dollar starts to fall in value, there is NOTHING the government can do to stop it. All they have is an unlimited amount of gasoline. All they can do is print more money, they have no other tools, NONE.



Now, many people may argue that they do have a weapon. They can raise interest rates and take money out of the economy. Let me tell you another secret.....

This will make the fire worse. It would completely collapse our economy and cause the people holding our debt to dump their gasoline on the fire.

The government can solve any problem, any problem you can think of, with additional money printed.

EXCEPT ONE.

Today, for the first time in a long time, the stock market, bond market, AND the US Dollar fell in unison. Bill Gross, the world's largest bond fund manager, said the fear was of the US losing its AAA rating.

That rating falling to AA or lower is the equivalent of the fire spilling over the campfire. Obama and Bernanke have one weapon to try and fix this problem, and when they use it our entire country will burn to ashes.

A look at the dollar index this week. (Measures our currency against a basket of five of the world's largest currencies)



The gold price has told a different story.

Wednesday, May 20, 2009

The New American Bull

Mmmmmm, you can taste the excitement in the air. The euphoria. The bottom is in, we hear, and the worst is finally behind us.

In early March, as the DOW was touching down around 6500, the daily sentiment index reported that the percentage of traders that were bullish was under 2%. This past week, as the stock market roared past 8500, the percentage of traders that were bullish clocked in at just over 85%.

So what happened over the past few months to cause this 180 degree change in investor attitude?

Stocks Rose In Price

This, and only this, was the determinant factor in investor psychology. Investors move in herds, and watching them move and reason together is fascinating.

What really happened is that stocks became much, much more expensive. The second event occurring simultaneously over the past few months was the fundamental structure of our economy worsening significantly.

The following is a chart showing the earnings of the 500 largest American companies, known as the S and P 500:



As you can see the earnings have disintegrated. In fact, they are down over 30% this year alone.

This means that as stocks have risen by over 30% (become more expensive), the earnings of these companies have fallen by 30%. This is not the formula for long term growth, and all indicators show this trend continuing. (Both the herd of investors entering the market, and the fundamentals of the economy deteriorating)

The stress tests for our largest banks has been a marvel unto itself. I have to admit, the government has played this hand extremely well. The phony tests provided a "worst case scenario" for the amount of capital these banks will need. This has allowed them to enter the market and raise private capital by selling new stock.

Bank of America just last night sold $13 billion worth of stock. This will allow the government a few months of breathing room before they have to come back in and provide these banks with additional money. Every investor purchasing these stocks now to hold will ultimately be annihilated.

This will give the government time to focus on destroying other aspects of our economy, such as the auto industry. With their quasi nationalization of our bankrupt and unprofitable auto business models, they have ensured that these companies will never become profitably and will never be capable of generating new capital in the free market.

They can also focus on two more additional storms fast approaching.

The first is the fact that states across the country beginning to go bankrupt. The incoming tax revenue is falling and in some cases disappearing due the economic collapse. These states will need bailouts.

The second is the major pension funds who are in serious trouble. Many of these funds changed their investment allocation over the past few years from the safety of government bonds to mortgages and stocks to try and receive a higher return. Most of the pensions entered these markets right as they collapsed. Because they do not have to report every month, this is a dirty little secret awaiting many retirees.

These two storms combined with the commercial real estate and credit card crisis should keep the government busy until the major banks start to collapse once again. Until then, enjoy the show, it'll be interesting to see how long the trillions of printed dollars can keep our bubble economy artificially afloat.

Tuesday, May 19, 2009

Video

Milton Freedman, one of the greatest economists in history, in a discussion with Phil Donahue. His thoughts are more timely at this moment in history then ever before.

Sunday, May 17, 2009

His Name is John Paulson

John Paulson received his M.B.A. from Harvard business school, finishing in the top 5% of his class. He worked for a few financial firms in the early 1990's before starting his own hedge fund in 1994 with two employees and $2 million in capital.

Since those early days his growth in the industry has been nothing short of breathtaking. In November of 2008 his hedge fund had grown to over $36 BILLION in size.

His credibility was under serious question back in 2006 when he decided to take an enormous bet AGAINST something called subprime debt. You have to remember that back in 2006 subprime was not a bad word, it was thought of as an opportunity for greater returns with little risk.

Anyone who was "short" this debt back in 2006 was laughed at by other money managers.

You know where the story goes from here........In the summer of 2007, subprime debt began to topple, and in 2008 it disintegrated.

John Paulson now starts this year as one of the richest men in the world and someone considered by his peers as one of the absolute best at what he does.

On Friday, May 15th, the world was able to see where he put his money to work in the first quarter of 2009. Once again, people were very surprised.

At the end of the first quarter.....

-Paulson became the largest hold of Spider Gold Trust, an investment firm that buys gold bullion and stores it. He increased his holding to 8.7% of the entire trust, a massive increase in his position.

-His funds now have a share class that is denominated in gold, not euros or dollars. This is unprecedented in the hedge fund industry.

-He purchased a 15% stake in Market Vectors Gold Miners ETF, a fund that purchases a basket of the top gold mining companies.

-He bought a 2.6% stake in Gold Fields, becoming the fourth largest owner, and he took massive positions in gold miners across the industry.

John Paulson, the man who stood against the world and bet against subprime debt, now sees a new opportunity. The question is, do you want to bet with him or against him?