Thanksgiving is tomorrow in the United States and in line with that celebration the market is giving thanks for some reasonably good numbers.
Initial claims dropped to a level that signals the economy may be entering into a recovery zone. While one data point does not make a trend it is certainly encouraging to see some improvement in this number.
Gains in October payrolls along with the subsequent increase in hours and wages resulted in an increase in consumptions of 0.4%. Once again not incredibly robust, but we will take whatever we can get at this stage.
Finally consumer sentiment reached a five month high. The move was driven mainly by the performance of the equity markets and the improving unemployment numbers.
Although these three indicators have not formed a legitimate trend it is encouraging that they are starting to improve. Further improvement will assist the market and hopefully will allow continued strength in the dollar as this will keep inflation down to a manageable level and allow the authorities the time to begin to implement austerity measures. We will see if they take the opportunity presented to them or whether they squander it.
Happy thanksgiving to everyone.
Wednesday, November 24, 2010
Tuesday, November 23, 2010
The Greatest Ponzi Scheme Ever
Charles Ponzi is credited with the scheme in which he defrauded investors of their money by paying fictitious returns to investors with new investors' money. All the while he was pocketing the proceeds. While he was not the first to perform such an act (he obtained his infamy in 1920 but there are reports of smaller schemes dating back to the 1850's) he was by far the largest and hence gained notoriety sufficient to have his name attached to these types of fraudulent activities.
Several Ponzi schemes have been uncovered over the years but the largest of them all (so far) was that of Bernie Madoff who made off with $64 billion. This was by far the largest ponzi scheme in the world until now. Madoff's count of $64 billion is being made to look insignificant when compared to the trillions of dollars of new money being printed by the Federal Reserve.
Bill Gross of Pimco fame (the largest bond fund in the world) stated: "Check writing in the trillions is not a bondholder's friend: it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme." And later he wrote; "It seems that the Fed has taken Charles Ponzi one step further. One and one-half trillion in checks written in 2009, and trillions more lie ahead. The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need - as with Charles Ponzi - to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not."
There has never been a Ponzi scheme that has worked. At some point you have to pay the money back. As Warren Buffet stated; "It is only when the tide goes out that you see who is swimming naked." The tide always goes out and redemptions always occur whether you are the Federal Reserve or Madoff. Therefore at some point the U.S. government has to start to become more austere or face the real possibility of a total collapse.
Inflation is coming. it is everywhere. To offset this the United States needs to ensure that the dollar is not destroyed but remains strong. To support the dollar the Federal Reserve needs to stop printing money and the White House needs to take some hard steps to balance its budget. The United States is desperate for a leader to stop the madness but I fear that we have none.
While there is still time to fix these structural problems the time in which to do so is rapidly subsiding. In my opinion we have less than five years to put our house in order or face the wrath just like all other Ponzi scheme operators.
Several Ponzi schemes have been uncovered over the years but the largest of them all (so far) was that of Bernie Madoff who made off with $64 billion. This was by far the largest ponzi scheme in the world until now. Madoff's count of $64 billion is being made to look insignificant when compared to the trillions of dollars of new money being printed by the Federal Reserve.
Bill Gross of Pimco fame (the largest bond fund in the world) stated: "Check writing in the trillions is not a bondholder's friend: it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme." And later he wrote; "It seems that the Fed has taken Charles Ponzi one step further. One and one-half trillion in checks written in 2009, and trillions more lie ahead. The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need - as with Charles Ponzi - to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not."
There has never been a Ponzi scheme that has worked. At some point you have to pay the money back. As Warren Buffet stated; "It is only when the tide goes out that you see who is swimming naked." The tide always goes out and redemptions always occur whether you are the Federal Reserve or Madoff. Therefore at some point the U.S. government has to start to become more austere or face the real possibility of a total collapse.
Inflation is coming. it is everywhere. To offset this the United States needs to ensure that the dollar is not destroyed but remains strong. To support the dollar the Federal Reserve needs to stop printing money and the White House needs to take some hard steps to balance its budget. The United States is desperate for a leader to stop the madness but I fear that we have none.
While there is still time to fix these structural problems the time in which to do so is rapidly subsiding. In my opinion we have less than five years to put our house in order or face the wrath just like all other Ponzi scheme operators.
Friday, November 19, 2010
Funny But True
Today's blog is just a link. While the link takes you to a video that is a tongue in cheek poke at the Federal Reserve it is funny because the facts are true. As sad as it is to say this video pretty much sums up my view on the state of the Us and the global economy. Regardless of this it is still some light hearted humor to end the week. Enjoy.
http://www.youtube.com/watch?v=PTUY16CkS-k
http://www.youtube.com/watch?v=PTUY16CkS-k
Tuesday, November 16, 2010
Accepting Responsibility
The current trading and economic environment is very tough. Making it even more tough are the majority of people that either by choice or through ignorance refuse to accept responsibility for their actions. This is prevalent throughout society and goes all the way to the top. For the best example look no further than the US congress, the senate or the Federal Reserve. How many times do they say one thing, do another and then try to receive praise when they did not even participate? It makes me sick and shows a complete lack of responsibility.
Now let's put it into a trading perspective. Most everyone I know reads the newspapers, follows the news on television and listens to what their "leaders" tell them. When something untoward happens it is easy for them to palm off the problem as being"out of their control" or "it caught everyone by surprise" or "the government will fix the problem". All of this shows a lack of responsibility and needs to be changed and quickly if you want to be successful at trading or any other endeavor.
There are a few simple tips that will stand you in good stead. Stop listening to what others have to say. This includes the so called "experts" on TV and in news print. Did you know that they are right less than 25% of the time? The problem is that they are never called back to report the score. All the producers and editors want is to scare people into believing that this will happen when in most instances it does not.
Do your research and make your own decisions. Now a fool is a person that guesses, gets lucky and calls it skill. Do your research as thoroughly as you can and then make your own assessment of the situation and act under those assumptions. What this will do is provide you with a plausible theory on which to base investment decisions. It will also alert you early when you are wrong, in time to save yourself from large losses. Relying on other peoples opinions such as tips or articles in newspapers will not give you any idea of when to exit as you will never know when things went wrong.
Follow these simple rules and I believe that you will find great success in trading and all business endeavors.
Now let's put it into a trading perspective. Most everyone I know reads the newspapers, follows the news on television and listens to what their "leaders" tell them. When something untoward happens it is easy for them to palm off the problem as being"out of their control" or "it caught everyone by surprise" or "the government will fix the problem". All of this shows a lack of responsibility and needs to be changed and quickly if you want to be successful at trading or any other endeavor.
There are a few simple tips that will stand you in good stead. Stop listening to what others have to say. This includes the so called "experts" on TV and in news print. Did you know that they are right less than 25% of the time? The problem is that they are never called back to report the score. All the producers and editors want is to scare people into believing that this will happen when in most instances it does not.
Do your research and make your own decisions. Now a fool is a person that guesses, gets lucky and calls it skill. Do your research as thoroughly as you can and then make your own assessment of the situation and act under those assumptions. What this will do is provide you with a plausible theory on which to base investment decisions. It will also alert you early when you are wrong, in time to save yourself from large losses. Relying on other peoples opinions such as tips or articles in newspapers will not give you any idea of when to exit as you will never know when things went wrong.
Follow these simple rules and I believe that you will find great success in trading and all business endeavors.
Monday, November 8, 2010
Fiscal Policy Implications
Now I am not one to hammer constantly on the Federal Reserve, nor am I one to hammer on anything for long. I am a trader and to win at this game you have to be able to realize when you are wrong and change directions quickly or lose a lot of money being stubborn. However, some times you have to stick to your guns or, in my case, have a trading strategy that is able to go with momentum while continuing to prepare for the inevitable.
At present the fiscal policy being implemented in the United States is one of quantitative easing. Not that I am completely opposed to quantitative easing, I am just opposed to how it is being implemented. For me the best example is one of starting a business. When you start a business it takes money, hard work, a belief in what you are doing and innovation. Of all these, innovation and money are most important. I can always find a better management team to get the job done, but without some core competency and the money to withstand a poor economy or lack of management, even the best ideas will fail.
Now assuming that the idea is fantastic and that you have unlimited sums of money, in theory you will not fail. It is just a matter of time before your product or service is noticed and then you are off to the races (unless someone steals your idea of course). Now let's turn our attention to the government quantitative easing program.
Essentially they have as much money as they need. Having their idea stolen is not an issue. so there is no problem there either. Now all they need is an idea. Well this is where they are falling flat. They are not even looking for ideas. Instead they are throwing good money after bad by buying junk debt from banks and the like. This is effectively supporting the banking system and allowing them to recover from their greed just to do it all again I fear. Where is the lesson other than now as tax payers we will be stuck holding the can for all of these government purchases disguised as "stimulus"?
Now what if we spent the money on ideas? Sure this is tough to quantify but if you had spent a large portion of the money on research and development, education and infrastructure projects then the future would look far more healthy as these ideas and projects would be the backbone of an American resurgence. Furthermore the American people would once again have their belief back instead of walking around with bowed heads. Unfortunately this opportunity has been wasted on political cronyism and paying bankers ridiculous bonuses for their greed. Certainly the dissatisfaction of the people was highlighted in the recent election results.
In the meantime the world continues to move away from investment in the United States. China, India, Brazil and other emerging economies are starting to take the lead and at some point in the future they will be the world leaders. I think that the demise has started and at some point the orderly decline in the dollar will turn ugly. This will drag stocks with it so be prepared. Furthermore I would advise you to have an allocation to gold and silver.
At present the fiscal policy being implemented in the United States is one of quantitative easing. Not that I am completely opposed to quantitative easing, I am just opposed to how it is being implemented. For me the best example is one of starting a business. When you start a business it takes money, hard work, a belief in what you are doing and innovation. Of all these, innovation and money are most important. I can always find a better management team to get the job done, but without some core competency and the money to withstand a poor economy or lack of management, even the best ideas will fail.
Now assuming that the idea is fantastic and that you have unlimited sums of money, in theory you will not fail. It is just a matter of time before your product or service is noticed and then you are off to the races (unless someone steals your idea of course). Now let's turn our attention to the government quantitative easing program.
Essentially they have as much money as they need. Having their idea stolen is not an issue. so there is no problem there either. Now all they need is an idea. Well this is where they are falling flat. They are not even looking for ideas. Instead they are throwing good money after bad by buying junk debt from banks and the like. This is effectively supporting the banking system and allowing them to recover from their greed just to do it all again I fear. Where is the lesson other than now as tax payers we will be stuck holding the can for all of these government purchases disguised as "stimulus"?
Now what if we spent the money on ideas? Sure this is tough to quantify but if you had spent a large portion of the money on research and development, education and infrastructure projects then the future would look far more healthy as these ideas and projects would be the backbone of an American resurgence. Furthermore the American people would once again have their belief back instead of walking around with bowed heads. Unfortunately this opportunity has been wasted on political cronyism and paying bankers ridiculous bonuses for their greed. Certainly the dissatisfaction of the people was highlighted in the recent election results.
In the meantime the world continues to move away from investment in the United States. China, India, Brazil and other emerging economies are starting to take the lead and at some point in the future they will be the world leaders. I think that the demise has started and at some point the orderly decline in the dollar will turn ugly. This will drag stocks with it so be prepared. Furthermore I would advise you to have an allocation to gold and silver.
Friday, November 5, 2010
The Trend is Your Friend - Until it Isn't
The market continued to roll higher yesterday, steamrolling all shorts out of the way. Many technical indicators point to further upside and the age old mantra of the trend is your friend is at the forefront of most traders minds. The problem with this is that until the economy is on solid footing there is a very high probability that all of this ends poorly, hence the trend is your friend until it isn't.
Nobody knows for sure when that will be and certainly we have had our share of excessively volatile days, but ignoring the fact that the market is rolling higher and sticking to your guns as a short is cause for not only angst but also large losses. The problem is that no sooner have you taken your protection off than the market has a large draw down. So what to do?
Certainly at this point it is difficult to continue to add to your long positions. The problem is that there are so many people out there waiting for a pullback to buy that it never comes, but adding here is a dangerous proposition. Hopefully you had a decent long position going into the rally and you are slowly leaking some stock into the run taking profits as they are handed to you. Stay disciplined and take the position off if your target is met.
Trail all positions with a stop. Certainly any positions that have been implemented due to the market momentum should always have a stop, but at this point I would also think it prudent to put in stops on certain volatile issues that you own.
Finally look for deep out of the money put options. These can be purchased cheaply and form a good deal of protection and potential upside if and when any large market draw down occurs. One thing I have learned over the years is that when markets turn they are fierce, quick and lethal and these options should reward you well at that point in time. Up until then they will all slowly die worthless so you need to be vigilant and constantly top up your holdings.
Remember that we are still well below the market highs and therefore are still in a secular bear market. Furthermore the rallies in the market are being driven by an ever weaker dollar. This is not a good environment for stocks as at some point the orderly downward spiral of the dollar could turn nasty at which point stocks will be hammered along with the currency, but for now that relationship remains intact.
The key here is to be extremely vigilant and cautious. Do not chase things higher and make sure that you have your downside protected as either a dollar rally or a dollar capitulation could derail the bull's party but for now the trend is definitely your friend.
Nobody knows for sure when that will be and certainly we have had our share of excessively volatile days, but ignoring the fact that the market is rolling higher and sticking to your guns as a short is cause for not only angst but also large losses. The problem is that no sooner have you taken your protection off than the market has a large draw down. So what to do?
Certainly at this point it is difficult to continue to add to your long positions. The problem is that there are so many people out there waiting for a pullback to buy that it never comes, but adding here is a dangerous proposition. Hopefully you had a decent long position going into the rally and you are slowly leaking some stock into the run taking profits as they are handed to you. Stay disciplined and take the position off if your target is met.
Trail all positions with a stop. Certainly any positions that have been implemented due to the market momentum should always have a stop, but at this point I would also think it prudent to put in stops on certain volatile issues that you own.
Finally look for deep out of the money put options. These can be purchased cheaply and form a good deal of protection and potential upside if and when any large market draw down occurs. One thing I have learned over the years is that when markets turn they are fierce, quick and lethal and these options should reward you well at that point in time. Up until then they will all slowly die worthless so you need to be vigilant and constantly top up your holdings.
Remember that we are still well below the market highs and therefore are still in a secular bear market. Furthermore the rallies in the market are being driven by an ever weaker dollar. This is not a good environment for stocks as at some point the orderly downward spiral of the dollar could turn nasty at which point stocks will be hammered along with the currency, but for now that relationship remains intact.
The key here is to be extremely vigilant and cautious. Do not chase things higher and make sure that you have your downside protected as either a dollar rally or a dollar capitulation could derail the bull's party but for now the trend is definitely your friend.
Thursday, November 4, 2010
Soak it up
So the Federal Reserve has officially unveiled the next round of quantitative easing. For those of you following this blog you will recall that I called that back in August (see blog on 8/10/2010). Well now it is official. Another $600 billion to start and maybe more later. On the announcement the market went berserk and volatility spiked, but at the end of the day the market ended up and most commodities spiralled higher as the dollar plunged.
The Federal Reserve is intent on "bailing" us out of this mess by driving the dollar lower. A weak dollar will strengthen exports. It will also have the effect of creating inflation as pretty much all commodities are traded in dollars. This will feed into the economy and inflation will start to surface sooner rather than later. For now however the Federal Reserve believes that more stimulus is needed (correctly) and that this can be achieved through continued money printing (incorrect).
The reason that they believe this is they feel that they "have the tools" available to soak up the money printed when there is any threat of inflation. What a joke! They cannot, have not and will not ever get that right. The methods for soaking it up are so arcane and so politically sensitive that it will never work. Let's look at this in terms of a scenario.
Inflation appears, gradual at first, but then it starts to accelerate. The cause of the inflation is two fold, too much "stimulus" cash in the system and a weak dollar. So let's start to soak it up. First we will deal with inflation by raising rates. Ouch that will hurt. Goodbye housing and the consumer who will now have to pay more for their debt. This will choke off any kind of recovery and cannot be done until we have a vibrant economy with strong employment.
Next we will start to sell off some of the government held debt (most of it junk). This will drive rates even higher and will reduce an already anemic rate of money velocity. Essentially the two methods combined will drive interest rates to excessive levels, choking off the recovery and driving the US economy into another recession.
Alternatively they could just let inflation spiral out of control but they will never let that happen without a fight. The Federal Reserve has at is core the mantra to fight inflation at all costs. Their ability to contain inflation within a target range is anything but stellar so I expect that as in the past they will wait too long to turn off the spigot. This will result in inflation will accelerating well above their target level of 2.5%. Not that controlled inflation is a problem it is uncontrolled inflation that can derail an economy.
So can they soak it up? Not a chance. Will their current policies end in failure? At this juncture there is a very high probability that another recession will be upon us within the next twelve months. Prepare yourself and your portfolio accordingly.
The Federal Reserve is intent on "bailing" us out of this mess by driving the dollar lower. A weak dollar will strengthen exports. It will also have the effect of creating inflation as pretty much all commodities are traded in dollars. This will feed into the economy and inflation will start to surface sooner rather than later. For now however the Federal Reserve believes that more stimulus is needed (correctly) and that this can be achieved through continued money printing (incorrect).
The reason that they believe this is they feel that they "have the tools" available to soak up the money printed when there is any threat of inflation. What a joke! They cannot, have not and will not ever get that right. The methods for soaking it up are so arcane and so politically sensitive that it will never work. Let's look at this in terms of a scenario.
Inflation appears, gradual at first, but then it starts to accelerate. The cause of the inflation is two fold, too much "stimulus" cash in the system and a weak dollar. So let's start to soak it up. First we will deal with inflation by raising rates. Ouch that will hurt. Goodbye housing and the consumer who will now have to pay more for their debt. This will choke off any kind of recovery and cannot be done until we have a vibrant economy with strong employment.
Next we will start to sell off some of the government held debt (most of it junk). This will drive rates even higher and will reduce an already anemic rate of money velocity. Essentially the two methods combined will drive interest rates to excessive levels, choking off the recovery and driving the US economy into another recession.
Alternatively they could just let inflation spiral out of control but they will never let that happen without a fight. The Federal Reserve has at is core the mantra to fight inflation at all costs. Their ability to contain inflation within a target range is anything but stellar so I expect that as in the past they will wait too long to turn off the spigot. This will result in inflation will accelerating well above their target level of 2.5%. Not that controlled inflation is a problem it is uncontrolled inflation that can derail an economy.
So can they soak it up? Not a chance. Will their current policies end in failure? At this juncture there is a very high probability that another recession will be upon us within the next twelve months. Prepare yourself and your portfolio accordingly.
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