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.

As Goes Goldman Sachs So Goes The Market - PART II

Attached is a link to Mish Shedlock's latest blog at Global Economic Trend Analysis. In it Mish discusses Germany being what was the last bastion of fiscal rectitude in the Euro region planning to significantly increase it's fiscal budget for 2010 resulting in a more than doubling of it's borrowing from 37 to 87B euros.

It is this excert from the article that is most interesting:

"Who Coulda Thunk?

Just a few days ago someone was buying UUP dollar calls (UUP is a long USD ETF). There were 340,000 calls traded vs. 183 puts. Coincidence?

What Happened Since

• Additional downgrades of Greece by Moody’s
• Action by the ECB on covered bonds
• German budget deficit about to balloon

There is a very big difference between a concentrated bet by one or two players and the masses speculating in calls. That trade smacked of someone knowing something (or thinking they did, and in this case correctly)."

courtesy www.globaleconomicanalysis.blogspot.com

Let's recap what I said in my original As Goes Goldman Sachs So Goes The Market post on November 16.

"The blood sucking vampire squids of the financial system generally have a good idea as to where the markets are heading. Even when they are wrong however they can still rely on the good grace of the US Treasury & Federal Reserve to bail them out as was the case in the disgraceful way the AIG bailout was handled.

Observant readers will notice that Goldman Sachs has a rather significant net short exposure to CurrencyShares Euro Trust. This is essentially a short Euro/Long Dollar trade."

Since that post UUP is up 3.8% (9.4% in AUD terms) so I guess Goldman Sachs knew where the market was heading again despite the incessant bearishness towards the USD at the time (which still remains by and large), just as they did when they were shorting the subprime mortgage backed securities they were selling to their clients in 2007.

Traders could do worse than to follow the "if you can't beat em join em" edict.

More evidence to support a strong USD

The attached article from http://www.zerohedge.com/article/apocalypse-not-dollar is a highly tehnical one but I highly recommend reading it.

Essentially the argument the article presents is that their are a whole host of countries in far worse financial condition even than the United States which lends weight to a potential rebound in the USD.

The markets have an excellent ability of doing what everyone expects it not to do. Right now there remains a fair degree of pessimism towards the US Dollar.

In the long run all paper currencies fail and the financial system we have today will like all paper money systems throughout history. The reason being that paper money is nothing more than a promise to repay, the only problem being that the only method of repaying is to print more money (or get banks to create it through new loans).

My positive view on the USD is a 1-2 year view. I think you can do very well out of this trade (please read my previous blogs for my view on the best way to trade this) however in the long run you want to be out of all paper currencies and into hard assets such as precious metals and mining and agricultural commodities, real estate etc. I would however would be cautious in buying these types of assets right now due to the extreme levels of optimism towards them.

END THE FED & related US Dollar discussions

An excellent article from Mish Shedlock completely breaking apart Ben Bernanke's recent Op-Ed in the Washington Post. See the full blog here.

In the same blog Mish links a Youtube video showing how comprehensively wrong Ben Bernanke has been right back to 2005. Why do people still listen to this muppet!! See the video here.

The Fed has to end now, since 1913, the year the US Federal Reserve was enacted the US Dollar has depreciated 98% (against the value of gold). The free market is more than capable (and probably far more efficient) at setting the appropriate interest rate for a given risk than any centrally planned monetary authority privately owned by the same Wall Street banks that benefit from this theft of middle class wealth by stealth.

SO WHY BE BULLISH ON THE USD???

Those who have followed my previous blog posts may wonder why I could possibly be bullish on the US Dollar against the backdrop of a completely malfunctioning Federal Reserve and not to mention political system at the mercy of the Military-Industrial Complex. It is an irony that as the majority of the world's debt is denominated in US Dollars it is the removal from the monetary supply of this debt through an increased deleveraging of the private sector due to high unemployment that causes a reduction in the total USD money supply and relative USD strength against other commodities, currency and financial markets. Now this on its own would not support the case for USD strength as it is important to note what you are comparing the USD to ie USD strength against gold, the Euro or what?

USD v Gold

Gold throughout history has been considered a store of value through its scarcity and relatively finite supply. Now the gold supply is not completely constant as new discoveries will increase the gold supply and industrial use will deplete supplies but for the sake of this argument we can assume that the supply is somewhat constant or at the very least far less volatile than any fiat currency such as the USD. What will change the USD gold price over a long period of time is the increase/decrease in the total supply of US dollars in circulation and to a lesser extent the change in popularity of the gold and USD in the eyes of the investor public.

Source - Steve Keen's Debtwatch http://www.debtdeflation.com/blogs/

In the above chart you can see that US Debt to GDP has reached a staggering 250%. This is extreme and began to turn down when the GFC hit before it began to march upwards again as the US Government stepped in with massive stimulus packages and the US Federal Reserve flooded the financial system with liquidity. This has lead to a rally in global equity and commodity markets including gold. On current forecasts the US Debt to GDP is forecast to hit 300% in 2010 and thats assuming the economy is growing! Obviously if GDP begins to decline again that ratio may be even higher. In my opinion we are close to the end in this government stimulus funded "recovery" that is not really a recovery unless you are a Wall Street banker on record bonuses rather than an unemployed middle class person on Struggle Street!

In my opinion the Fed Reserve & Government will not be given a second chance on increasing federal debt at already extreme levels when they see the fairly muted effects of the original stimulus in its inability to stop private sector deleveraging and actually encourage credit creation. The Fed Reserve has already announced their intention to remove $1.5 Trillion in emergency liquidity by March 2010. This I feel will be a nail in the coffin as the investor public re-shifts its focus back to the systematic private sector deleveraging that began in 2008 and will expand to US municipality bond defaults, large coporate debt/commercial property/residential property defaults and so on and so forth. The government will not be able to offset this rampant deleveraging a second time after the first effort will be shown to have had no effect.

Bringing it back to gold it is my opinion that a precipitous decline in the total USD money supply versus a relatively static supply of gold that will lead to a reduction in the value of gold priced in US dollars. Further to that the widespread mania around gold where Central Banks are announcing large purchases of it, people are calling for the Death of the US Dollar it appears to be a very crowded bullish gold trade at the moment in USD terms. I can't pick the exact timing as to when things will turn but I don't think it is too far away. In the longer term all fiat currencies die as people stop accepting a currency backed by nothing more than a promise but I think we have deflation first through credit deleveraging before we get to that. It already began in 2008, I am only arguing for a continuation of that.

N.B this is not an argument against the holding of gold. I think everyone should own some physical gold as some protection. Who knows these maniacs may never turn of the printing press and completely destroy any remnants of value in the USD. It is merely an argument for USD strength in the near term (ie the next 6-12 months, anything further than that is a complete uneducated guess).

USD v AUD

I am an Australian based investor so what was important to me in forming a view on the USD was how did I think it would compare to my home currency. I encourage those in other non-US countries to conduct their own research as this is purely an AUD perspective.

Source - Steve Keen's Debtwatch - http://www.debtdeflation.com/blogs/

As you can see from the above chart both Australia and USA have had massive expansions in debt over the last half a century, far in excess even of the Great Depression and the Depression of the 1890s. The question is as deleveraging gathers pace to what extent will there be a destruction of the respective money supplies of both the USD & AUD. The above chart courtesy of Dr Steve Keen's Debtwatch blog suggests that the US has a much higher base of debt from which to contract and hence will result in a more extreme contraction in money supply relative to AUD contraction and thus in theory this (assuming all other variables remain constant, which they of course won't and I will discuss some below) will cause a rise in the value of USD relative to the AUD.

The Carry Trade

Lending further to this argument of USD/AUD strength/weakness is the carry trade. This is where an investor borrows in a low yielding currency such as the USD or YEN and invests in a higher yielding currency such as the AUD or NZD. As the investor borrows USD's this increases the total supply of USD money and hence lowering its relative value to AUD and other currencies. Those of you who don't believe in this phenomenon may wish to look at the performance of the AUD/USD over the last 6-8 mths following the beginning of the equities market rally in March to now. As you will see it has mapped a very similar path to the performance of the S&P 500 & the ASX 200. Please follow the link to Google Finance here. When this "mother of all carry trades" as Nouriel Roubini calls it turns there is going to be a correction in equity markets an rally in USD to dwarf that of what we saw in 2008.

Comments/criticisms more than welcome.

Fraudulent BLS Statistics

An excellent post here from my favourite blogger Mish Shedlock referencing an article from the New York times of the Labour Department having overstated jobs created this year by a colossal 800,000.

For those that want the full NY Times article they can read it here.

Mish Shedlock and David Rosenberg have been bleating on about this for months and I totally agree with them. That is that the Births/Deaths adjustment is useless. How it can say that more jobs were created from new businesses created through the GFC than lost through business that disappear is beyond me.

Of course the talking heads on Mainstream Media will explain this away as a non-issue and keep cheerleading this100% government stimulus/media manipulated pseudo recovery.

I don't know when the market will crash or even if it will but gradually the curtain is being lifted as to the monumental fraud that is being perpetuated across many fronts.

Hey even man made climate change data is being manipulated! Take a look here.

Pleading for sanity

Here is an interesting article from Mish Shedlock of www.globaleconomicanalysis.com on the parlous state of the US housing market.

Credit is contracting faster than Helicopter Ben can print it, now if the banks just marked to market perhaps we will see some temporary sanity prevail & maybe just maybe the S&P 500 will no longer be priced on 100x earnings and with the destruction in the USD money supply as a result of this credit contraction perhaps we may even see a reversal of fortunes there.