Geithner inadvertently calls to End The FED!

In the following link courtesy of Mish Shedlock's Global Economic Analysis Tim Geithner has a bit of a brain snap in his own way highlighting the reasons why the Fed Reserve should be removed from it's powers.

I agree with Mish, Ron Paul is frustrating because he could destroy Geithner if he wanted to, perhaps it is his underlying intention not to, despite his pro free markets stance, he is a politician after all, he may just be playing to his ever growing audience………

What I did find amusing is how at about 4m30 into the video Geithner inadvertently suggests the Fed should be removed from its powers. His words:

“When we think about what system should replace our current system, a critical part of that is to ensure you don’t have institutions with private shareholders taking advantage of a subsidy from the government that leaves the tax payer exposed to the risk of substantial losses.”

To his defense he was referring to Fannie Mae in his explanation but pray tell me what exactly is the Fed Reserve if it does not meet the above description?

The Fed Reserve is owned by private shareholders, being the major Wall Street Banks, has a government sanctioned monopoly over the control of the US Money Supply (never fully ratified in 1913 and arguably unconstitutional as there were an insufficient number of congressmen that voted on the Christmas Eve Bill but that’s another story) and has the authority to by both foreign government debt and any toxic waste they decide to take off their shareholders balance sheets exposing the tax payer to massive losses?

“Give me control of a nation’s money supply and I care not who makes the laws”

Mayer Amschel Rothschild

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When the contrarians become consensus

Attached is a link to a 1 hour video of a Russian Economic Forum - "Where is the money in 2010". Participants included Marc Faber, Nassim Taleb & Hugh Hendry, some of the most outspoken minds in financial markets. There were a couple of other talking heads that made piecemeal contributions to the debate but those three were the main players.

The question was put to each particpant - Where would you invest $100m for 2010? The sad thing for me as a contrarian is they were all, with the exception of Hugh Hendry, bullish on the same asset classes such as China, commodities, food etc and bearish on the USD, US Treasuries as mainstream financial media & particpants are.

In my opinion, when even the usual contrarians join consensus you have a very crowded trade.

Now being contrarian does not make you right, it is a very lonely profession, when you are wrong, as people with this inclination are usually outspoken in their views (like your's truly) people love letting you know about it. When you are right nobody gives you a pat on the back.

I have harped on for some time now that given the extreme level of pessimism towards the USD it would not surprise me one bit that it will rally in 2010 against declining global equity & commodity markets.

I would like to point out the example of the tech bubble in the late 90s with the underlying fundamentals being that the internet was going to revolutionise the way people did business, spreading prosperity around the globe. This drove tech stocks to ridiculous price levels and then in 2000 the market crashed. Fast forward to today and the internet has a highly significant role in the way the world does business, the issue however is what price are you willing to pay for this. The facts are as the research of Bob Precther from Elliot Wave International (find out more to the right of this blog) attests is that GDP growth during this tech boom in the US was substantially weaker than the post World War II expansion in the 50s & 60s. Unemployment was higher etc. These are the facts behind the fundamentals.

It is my opinion that yes, long term the US is on a path of destruction, it has no manufacturing base, it has a disaster of a foreign policy and an overleveraged consumer. I have much more confidence in the future prosperity of places such as India, Vietnam, Brazil etc that have a productive base to grow off. The problem for me with that at the moment is that equity/commodity markets in these countries are fully pricing, if not overpricing in this future prosperity. Contrasting that they have priced the USD for imminent destruction. Timing is everything so I sit and wait patiently.

The markets so often move in the path least expected.

Hugh Hendry stands head and shoulders above the other panel members in his ability to articulate his point of view free of catch phrases, slogans and hyperbole so often the playgorund of the permabulls but now appearing to infiltrate the usually contrarian.

Births/Deaths Model Adjustments and the distortion of Payrolls data PART 2

Following on from my January 7 post on the gross incompetence or outright manipulation (I know what I think it is, you can make up your own mind though:) of the BLS Payrolls data I note today a blog from Mish Shedlock discussing the BLS's revision of 824,000 jobs added by their flawed Births/Deaths model in 2009.

To recap from my last post on this topic we discussed that in January 2009 there was a 359,000 revision as the Birth's/Death's model had overestimated the number of new businesses created during 2008 compared to those that went under. This time around there has been a 229% in the number of jobs they have overestimated into existence throughout 2009.

Does this look like green shoots to you? I should think not.

I also discussed the coincidence of a 20% decline in the DOW following the release of last years "revisions". Since yesterday's announcement we have seen a 2.6% decline in the DOW and since my January 7 post the DOW is down about 6%.

NB CORRELATION DOES NOT MEAN CAUSATION!

I am only drawing the comparison of the DOW decline out of interest more than anything else. There are a wide range of issues that will contribute to a continual slide in the DOW. My other blogs will attest to that. The BLS is just a representation of the misplaced optimism many people have in the positive effect the global government's stimulus packages are allegedly having in bringing the world out of recession.

Long USD/Short US Equity markets in my opinion remains the trade du jour for 2010.

The Looming Sovereign Debt Crisis

Below is a chart courtesy of a very interesting article from Forbes.com by Daniel Fisher. For those who wish to read the full article can do so here.


For those calling for the death of the US Dollar and resultant rush to commodities priced in US Dollars might wish to review this chart. Now Iceland is a snapshot pre crisis and let's be honest it isn't really one of the big players anyway.

Third and fourth on the list however, UK & Switzerland might cause a few more headaches, not to mention the Euro Zone.

The next major crisis in my opinion will come from Europe, the problems currently occurring in Greece are a small but not insignificant component of what I envisage will be heading our way in the near future.

I continue to remain bullish on the USD having looked like it bottomed late 2009 although a short term pullback cannot be ruled out.

Bob Prechter of Elliot Wave and his view on the Invincibility of the Fed

Interesting article today by Bob Prechter on how the market's interpretation of the US Fed's actions may be another great contrarian indicator of future market performance.

In it he discusses US Long Bonds performance over the course of 2009. At the beginning of the year with the Fed Reserve's announcement of its intention to buy $300B of long term US Government debt (on top of $1 Trillion of mortgage backed securities) one would have suspected US Long Bond prices to rally however as Bob shows the performance for the year was -26%. At the time there was an extreme 99% bullish trading sentiment, classically set up for the correction that followed.

Those who wish to read the original article by Bob Prechter can simply click on the Elliot Wave International logo to the right of this blog or follow this link.

Now with the profligate spending being announced by the Obama Administration leading all the inflationists to call the death of the dollar being imminent perhaps something else in in store. A US Dollar rally would be the equivalent direction to that which we saw in US long Bonds discussed above.

Perhaps the dollar's death is some way away yet?

Reconciling the Inflationist & Deflationist Camps

In Mish Shedlock's latest update (see here) he attempts to reconcile his deflationary bias towards global asset markets with Marc Faber's focus on inflation. He highlights the possibility of a sovereign debt default of one of the PIIGS (Portugal, Italy, Ireland, Greece & Spain) along with other troubled areas such as Mexico along with the housing bubbles in Australia & Canada in particular. Mish's blog goes into more detail than I do here.

The interview on Yahoo's Tech Ticker with Marc Faber can be found here.

Essentially it becomes a meaningless argument as both inflation & deflation in my opinion will happen but at different times in different places. What is important however is how to profit from it.

I am bullish on the US Dollar purely from the perspective that I am an Australian Dollar based investor. It is all relative. A rising US Dollar will merely be the result of a collapse of the Euro and/or the Yen first (which will bring the Aussie Dollar down with it as it has rallied strongly on the back of a recovery in equity & commodity markets), NOT the result in my opinion of an improving US economy. That is an important point.

I am not looking forward to seeing how this plays out.

Mainstream Media jumps back on the Depression bandwagon

A very well written piece from Saturday's Sydney Morning Herald on the economic perils that we face this year. Article can be found here.

It is not often you see such bearish pieces in the mainstream media being the cheerleaders for the bull market that they usually are so I was quite pleased when I saw such an honest article. I was very interested in their argument on the US Dollar, that being that given the parlous state of EU, Japanese, China et al finances, worse even than those of the US that in their opinion the rally in the USD will gather momentum this year.

Forgive me for being the boy who cried wolf on this, just keep hoping I am wrong:)

Mainstream Media jumps back on the Depression bandwagon

Births/Deaths Model Adjustments and the distortion of Payrolls data

Attached is a link to Mish Shedlock's latest blog  that discusses the 38% rise in business bankruptcies in 2009. The below table is attached from Mish's blog.

For those that aren't aware the Births/Deaths Adjustment is an estimate of the net jobs created/lost as a result of the forming of new businesses and closing of others. The bottom numbers on a month by month basis are most critical. In January 09 there was a large negative adjustment (-356K) for the previous years overly rosy projections of job gains as the recession was going through its early stages.

With a 39% increase in bankruptcies for 2009 versus a Births/Deaths model adjustment of a net 1.179M job GAINS between February and December what do you think the chances are of another adjustment to the January 10 data that will come out in February? (N.B we will still have to probably endure another positive print for the December numbers first which come out tomorrow)

Either the BLS is outright manipulating the data or they have learnt nothing from the mistakes they made in 2008.

I will leave it to the reader to decide.....

One final thing the reader may like to be aware of is that following the release of the January 2009 payrolls data on February 4 2009 the Dow declined a shade under 20% over the course of the next month to its March 9  low.

The two may not be related but one should be at least aware.