Saturday, November 7, 2009

The Week In Review

A tremendous amount of news, data, and government plans have hit the financial world over the past few weeks. I'd like to take a minute to look at these individual topics with some actual economic and financial reality.

Let's start with the jobs report which was the big news event of the week on Friday morning. This report comes out on the first Friday of every month. Unemployment crossed 10% as 190,000 new workers were laid off. The U6 number crossed 17.5% and real unemployment crossed 22%. Last month I wrote a full article titled "Understanding Unemployment" which readers should reference to get a better scope of the numbers.



What is even more important than the total number is the breakdown on which sectors of the economy are hiring and firing. For example, the manufacturing sector lost 61,000 jobs while the education/health services gained 45,000 new jobs. The government jobs increased as well.

While it is important to have people working in the education and health sectors of an economy, simple economics explains that the manufacturing jobs are what pay for education, health, and government services within a nation. A country that produces goods and saves their money has the luxury of affording government jobs.



On a similar note this week the administration decided to extend unemployment benefits to help ease the massive unemployment sweeping the nation. Obama announced this move as a tremendous benefit to the economy as the people receiving the checks can now go out and spend.

One must wonder if the President is joking when he says these things.

If someone is receiving an unemployment check that means someone else was taxed in order to pay for the benefit. It is not an increase in wealth, it is a transfer of wealth. If unemployment checks helped the country, why not just send checks forever and send every family a check for $10,000 a month? Of course, taxes were not raised to send the families the money, it was borrowed and taken out of the purchasing power of our currency, the hidden tax.

Speaking of the currency, the Federal Reserve announced at its meeting this week that they would be keeping interest rates at 0% and that they planned on keeping it that way for an "extended" period of time.

The Bank of England has followed with keeping rates at .5% and the Euro Central Bank countered with their 1% stance. Both banks plan on keeping rates this low for an "extended" period. There is no difference between 0%, .5%, and 1%, they all represent essentially free money everywhere. Dumping from helicopters.

So where is this free money going? We got a glimpse this week as we received word that bank reserves are exploding. They have recently crossed over the $1 trillion mark and they continue to grow month after month.



This means that banks are borrowing money from the bank at 0% and storing the cash with the Federal Reserve at .25% interest. This $trillion in new money if lent out could immediately become $10 trillion under the fractional reserve banking system. The deflationists would argue that the money is being held to cover current and future losses on their balance sheets. They are exactly right.

However, last March banks were allowed to change their accounting standards so they could mark their assets to "myth" instead of market. This means if they have a commercial loan of $100 million and the building is only worth $50 million, they do not have to take the $50 million in losses, unless the building is sold.

This brings us to the next topic which is the shadow inventory stored on the banks books. Recent estimates show that 85% of the Florida foreclosed homes are being held off the market by banks in order to prevent these losses. Both the excess bank reserves and excess shadow inventory present the same picture:

The banks have $1 trillion on their balance sheets cocked like a fire hose waiting to be unleashed. The real estate market has a ocean of inventory hidden from the public cocked like a fire hose waiting be unleashed.

Fannie Mae and Freddie Mac have found themselves in a similar situation, only on a larger scale. This week they announced their new "rental" program. If I was writing on this web page and trying to imagine the worst possible things the government could do, I could not come up with these examples.

In order to deal with the tsunami of foreclosures and losses hitting their books month after month, (they just went back to the government for another $15 billion to cover losses) they have decided to allow homeowners that enter foreclosure to rent their current homes at free market value and be excused from their debt burden.

This means if you owe $500,000 on a home in California and the home is now worth $200,000 (a very likely scenario) and you stop making your monthly payment of $5,000 every month, the government will allow you to rent at the market rental value of around $1,500 per month.

Hold on, it gets better.

Because you are now a renter, if you have damages to your home, or your toilet is broken, or a light goes out, you can now call on the government to come fix these problems; Big daddy landlord.

The losses from this program will be so staggering it is impossible to quantify. Losses have no meaning now for Fannie and Freddie because they are government run entities. All the losses are now paid for by the taxpayer.

Or are they? I have heard of no new tax increases to pay for the endless spending, but you know who is paying for the losses; it comes from anyone who is stupid enough to hold American currency. Unfortunately, that appears to be the American people who have absolutely no understanding of what is taking place.

Foreign dollar holders are running for their life right now toward hard assets such as gold which crossed over the $1100 mark on Friday morning.

As I said all of last year, I anticipated 2009 as the year gold would cross over the $1,000 mark and would mark the very beginning of the public entering the market. We are seeing that today as some of the early entrants are adding "small" amounts to their portfolio. The public invests in an asset because the price is going higher so as the gold price continues to rise in the coming years it will bring on more and more of the masses.

I imagine there will be a tremendous pull back coming soon in the price of gold, and there is a huge rally due for the dollar. Take these actions as a gift and add to your positions. The real value in the precious metals market today is in silver and mining stocks.

If gold sells off, which I hope it will, it will probably take down the price of silver and the mines and will present a tremendous buying opportunity.

Tuesday, November 3, 2009

India Takes Their Position

A major news story a few months ago was that the International Monetary Fund (IMF) was going to be selling a significant portion of its gold reserves in order to raise capital to help countries in need of additional bail outs.

This struck fear into the heart of gold investors (including myself) because the amount of gold they planned on selling was an enormous quantity.

This afternoon they announced that they had already sold half of the total gold they plan on selling. The number of buyers that it took to sell it all? One.

India stepped to their window and took every ounce of gold they could get their hands on. They have essentially rung a bell that is now being heard around the world.

The important part of India's purchase is not that they want to accumulate more gold, it is that they want to diversify themselves out of their dollar reserves. THEY DO NOT WANT THEIR DOLLARS.

The entire world is playing a game of musical chairs right now, and everyone is taking their positions as quietly as possible.

China has gone on a spending spree over the past twelve months accumulating copper, steel, oil, gold, and companies that produce natural resources. Instead of funneling the majority of their savings back into United States treasury bonds, they are diverting their money elsewhere. THEY DO NOT WANT THEIR DOLLARS.

In the meantime, back home here at the States, we need the world's savings more than any time in history. Obama has announced a budget deficit next year in the order of $1.4 trillion.

That means the rest of the world has to send every dollar that they work hard to save in order to finance our budget deficit. Not only that, but they have to do it every year moving forward, forever. Our leaders have no plans on cutting spending, and they have already told the rest of the world that is our stance.

Remember, Obama has estimated a $1 trillion+ budget deficit over the next ten years, assuming that our economy rebounds sharply and begins growing again right away.

Speaking of that, lets take a look at how we're doing. As part of Obama's "stimulus" program of close to $800 billion earlier this year he has and will continue to send hundreds of billions to state and local governments.

The plan was to stimulate the economy with fresh new jobs with these fresh new bills. Unfortunately, the state governments are themselves running massive deficits as the local real estate and economies crumble around the country. The money from the stimulus program will run through next year. What happens after that?

The Lieutenant Governor of New York last week estimated that in 2011 state governments will run a $500 billion deficit.

$500 billion!!!!!!

This will be added to the $Trillion plus national deficit if we get the rosy economic picture to emerge. As our economy continues toward oblivion and unemployment moves closer toward 25%, you will see calls for stimulus number 2, then stimulus number 3.

To add to this debt, Obama's team has also announced their new Obamacare plan. The cost? $1.2 trillion.

$1.2 trillion!!!!!!!

Please understand, I would like for everyone to have medical care. I would like for the government to send stimulus checks to everyone in the mail, and I would love to have them create employment for everyone.

BUT WE HAVE NO MONEY. WE ARE 100% INSOLVENT!

We owe $100 trillion, we are adding $5+trillion in total debt per year, and the numbers grow worse as we move forward.

The rest of the world is moving as fast as possible right now out of their dollar positions. What do you think will happen when they not only do not finance our $1.4 trillion deficits, but they actually become net sellers?

That kind of stuff is not important, so lets talk about something more fun.

Billionaire Wilbur Ross sent shivers through the real estate market last week when he announced that we have not even begun the commercial real estate meltdown. He came back on CNBC this morning, not to take back his statement, but to reconfirm it. He also said that he felt the government would not save the commercial real estate market the way that they are artificially supporting the residential market.

Why? "Because buildings do not vote, but households do."

His words were music to my ears as I believe this is where the NEXT investment opportunity in this country will be located. As money over the next few years moves away from American stocks, real estate, cash, and especially bonds, it will move toward the emerging markets and commodities.

This will be the time to sell your foreign stocks and commodities for American real estate as the market is on a fire sale. Banks will once again be giving property away for pennies on the dollar, just as they did back in 1991 during the savings and loan crisis. Only this time the opportunity will be far greater.

Warren Buffett this morning announced the purchase of a major American rail company, saying that he is betting on the future of America. What did not get press, however, was that every time he said that during the interview he said he was betting America will be a better country 10, 20, or 30 years from now.

I agree with him 100%. When Clinton, Bush, Obama, Greenspan, Bernanke, and their minions finish destroying everything this country represents, I believe that when we begin to rebuild it will be the buying opportunity of a lifetime. We will once again be the greatest emerging market in the world.