The Prudent Ox Economics and Financial Blog

Post-Thanksgiving Thoughts on the Future of US Futures and Markets

2011-11-29T15:08:00.000-08:00

I'm reflecting on the state of American markets after Thanksgiving, and not sure I like what I see. The MF Global meltdown and closing down of Barnhardt Capital Management are two major events that show eroding confidence in the US (and probably global) financial system. The only collateral that financial paper assets (which include futures and options contracts) have are the public's confidence in those assets.

These two events may be key turning points looking back on this time in American financial and political history. Unfortunately, the government and politicians are joined at the hip with big business and US financial markets; and there's no such thing as truly free markets anywhere in the world. Central banks and financial regulators are constantly intervening to prop up (or knock down) certain markets to benefit their contributors, boost or dampen confidence in specific markets.

The MF Global event may be a combination of an unexpected "Black Swan" event (name of the Nassim Taleb book) and a modern-day canary in the coal mine. I don't know many financially-astute people who were concerned about the solvency and legitimacy of US futures and options markets before now. Right now, anyone who trades futures and options should make damn sure the company they trade through is financially sound and solvent.

If this has been happening at MF Global, who's to say that it hasn't been (or isn't happening) at other commodity brokerages? If so, how safe are your funds and positions?

As I'm thinking out loud, US and EU government officials may have ran out of suckers to buy their Euro-trash debt. In order to fill the gap, the Federal Reserve could either print money out of thin air - or, they could find the most liquid markets and source of funds on the planet, such as commodity brokerage firms.

If (more likely when) Greece is officially declared bankrupt, and the Euro and EU can no longer be functioning, long-term entities, this will probably set off a daisy-chain of financial events - and they won't be good ones. Almost the entire world is leveraged to the hilt with debt at the government, corporate and household levels.

Trying to borrow and spend your way to prosperity and freedom is like trying to drink yourself sober - it's impossible. The biggest financial hangover in the history of the world is descending upon us, and there's no avoiding it. No more financial Bloody Marys or "hairs of the dog" to avoid the pain.

I want to envision a positive future financial scenario, but I'm having a difficult time doing so. This massive amount of debt will have to be resolved either through repayment or default (probably more of the latter), and in America we won't see the easy or profligate use of credit for a long, long time - probably for decades.

Residential real estate has a few strong headwinds: 1) A sluggish economy, which doesn't appear to be coming back for awhile, 2) Tightening of credit standards, and lending to home-owners, and 3) Issues with determining title, generally due to MERS - which allowed transfer of a mortgage without having to pay transfer taxes and fees to cities and counties.

What's the bright side of this current recession/depression? It's that most of the knuckleheads in business are being flushed out, and the better business owners are staying put. The cream is rising to the top, and the fools are being dealt with. Common sense and good financial values are (hopefully) returning to America, and people are re-gaining their senses from the days of day-trading dot.com stocks, and flipping houses.

It's a painful lesson to learn, but one that our country has had coming for a long, long time. Unfortunately, it's time to pay the piper and endure the pain; but we could see a nice rainbow after all this rain - that's my hope for the U S of A.

Great Buying Opportunity in the Metals

2011-08-24T14:36:00.000-07:00

No two ways about it - gold and silver got smoked today, along with the SLV calls I bought this morning. The barbarous relic was down about $100, silver lost over 6% in today's trading. I still believe the longer-term trend is up - way up. That's because the Federal Reserve and federal government (not the same entities) have told us with interest rates near zero until mid-2013, their only solution is to try and inflate their way out of the debt mess we're in.

It's possible we could see a further correction in silver and gold, but today gives investors a great opportunity to buy the physical metal at a discount... and maybe an entry point for gold and silver stocks/ETFs. Tray tables and seats in the locked and upright position, folks; this is gonna be a really bumpy ride for the foreseeable future.

My takes on the stock market, and what lies ahead...

2011-08-04T23:52:00.000-07:00

Today's 512-point plunge in the Dow reminded me of the Crash of '08. We may see a "relief rally" on Friday of a few hundred points; however, if the news from Italy about possible bank runs and credit locking up is true... then look out below. I don't see a sideways market today... it'll probably be a 'rocket ride' up or down.

If we get the rally, Wall Street has dodged a short-term bullet for now... but there are many more financial and economic "bullets" to come. If it tanks lower, then Katie bar the door - this could get real ugly, real quick.

I implore any investor with 401(k) or IRA money in the stock market: If you don't know what you're invested in (or why), GET OUT OF THE STOCK MARKET - NOW. If you can't get out right away, wait to sell into the next rally and go 100% to cash.

Only the nimblest of traders can survive in this market, forget about 'buy and hold' investing that most financial planners and stock brokers recommend. Their job is to get you and keep you in the stock market - probably not what's best for you and your wealth.

Through all this panic and fear, I see two ETFs and an index that I like:

UNG - Natural Gas ETF, which hit a 52-week and 2-year low today. Nat Gas has a history of going dormant for a few years, then exploding higher like a volcano. This could take awhile to realize gains, but if you're patient enough (a few months to over a year), I like buying this ETF and longer-term call options at strike prices of 12.00 and 13.00.

SLV - Silver ETF that's directly tied to the NYMEX spot silver price. I'm not sure if the sell-off in silver is done, but as we see more panic and less trust in paper financial assets, more investors will put money in tangible assets, like gold and silver. I want to see Friday and Monday's trading action to make sure this short-term move is close to finished, before going long on SLV.

VIX - This is the volatility index, which popped 8 points today - or about 30%. The more fearful the market gets, the higher the VIX goes. If we get the relief rally on Friday, the VIX will come back down - which could give a great buying opportunity for the index or call options. But if the market tanks and the VIX goes higher, wait for the next pullback to get in.

You ain't seen nothin' yet, this stock market has a long ways down to go - possibly to the March 2009 lows of 6,500 on the Dow.

Pull up a chair and get your popcorn out - Friday's market action will be a heckuva show.

Debt Deal Was a Dud and a Fraud

2011-08-03T11:11:00.000-07:00

Not much to say about this fiasco - this just "kicks the can" of debt and spending down the road and prolongs the financial day of reckoning. There were no actual spending "cuts" made, just reductions in the amount of proposed spending increases. In Washington-speak, we won't spend as much as we planned to spend, so that's a cut and will help reduce the deficit.

In reality, it does nothing except maintain the Beltway status quo.

It's like giving a drunk two more shots of vodka and Red Bull to keep him partying later into the evening. In the short-term, he can keep partying... but in the longer-term, when he wakes up the next morning or afternoon, that hangover will be a doozy.

That's the best analogy I can think of to describe the cause of the American economic boom, and the following bust. Commodities and stock markets don't like the Debt Deal at all - gold has gone up $50/ounce since Monday, the Dow tanked 275 points on Tuesday. Europe still has major financial challenges with the amount of debt carried by Greece, Italy and Spain - frankly, I don't see the European Union or Euro as a viable entity or currency in the longer-run.

This financial "hangover" that America is facing will be really nasty. We got a taste of it from the stock market and real estate Crash of 2008. How bad will it be? Think of your worst hangover in college, where you're dry-heaving over the toilet late into the next afternoon.

When you swear "you'll never get that hammered again," only to go out next weekend and party it up. Unfortunately, the consequences to Americans' wealth and standards of living will be much more severe than acute alcohol poisoning. This hangover will take years - and probably a decade or more - to work through.

I doubt that America will re-gain it's standing as an economic superpower, because most of the success was fueled by debt, having the world's reserve currency, speculation... and ultimately confidence in our country, economy and financial system. The real collateral and support for financial paper assets and nations is in the public's confidence in those assets, countries and governments.

Once the confidence goes, it takes a very long time to recover - and sometimes it never does. Think Enron... MCI Worldcom... Global Crossing stocks; or failed nation-states and empires throughout history. We're in for major paradigm changes in politics, culture and economics as the Greater Depression unfolds. There will be many fortunes lost, but some will be made in the chaos, confusion and mis-information.

Wealth will NOT be made by investing in stocks like Sitting Bull - or buying and holding forever and ever. Information moves too quickly, industries and companies change at a faster pace, Wall Street and governments manipulate markets. For an average individual stock investor, you're playing in a financial casino that's rigged against you.

Wealth WILL be made by people with vision, foresight, and a willingness to serve and provide VALUE. Forget about flipping houses or day-trading stocks, it's more about old-fashioned values and good business fundamentals - just like many of our parents and grandparents did it. That's the silver lining in this massive economic storm, that our country will (hopefully) get back to basics and common sense business and moral values - Lord knows, our country definitely needs them now more than ever.

SNL Obama-Hu skit speaks volumes about US debt problem

2011-06-08T13:45:00.000-07:00

I was at a friend's house Saturday night, talking about business and life when SNL came on the TV. I don't watch much television, so we took a break from the conversation and watched one of the skits.

I remember SNL from the 70s and 80s when Bill Murray, John Belushi, Dan Akroyd and Eddie Murphy were cast members. Maybe it was because I was growing up and didn't pay that much attention to politics, but I never remembered SNL being really political.

However, I was taken aback when I saw this skit that showed Chinese Prime Minister Jintao Hu accusing President Obama of being a liar and trying to screw him and his country with the enormous debt that the United States owes China.

It was funny when the actor playing Prime Minister Hu said: "Why you not kiss me before you do sex to me?"

If Saturday Night Live realizes the American debt problem is this big and virtually unmanageable, I'm pretty sure that China and every other nation-state on the planet understands this as well. Under George W. Bush, it was apparent that the federal government had no intention of being fiscally responsible or getting close to a balanced budget.

Under President Obama, it's doubly apparent that the political inmates (Republican, Democrat and Tea Partiers alike) are running the asylum and want to do what's politically in their self-interest, instead of what's in the best interest of American citizens.

Even if Benny and the Feds don't "officially" implement QE3, it looks certain they'll continue to print large sums of money to try and inflate their way out of this debt problem and keep the economic party going as long as possible. Based on this SNL skit, it looks like the credit/debt/currency keg is just about dry - and the party's almost over.

Got gold and silver?

Natural Gas Breakout?

2011-05-23T10:51:00.000-07:00

I've been watching the NatGas market for the past several months, anticipating when it would break out of it's trading range from $4-4.50/mcf. Based on the past two days price action, it may be ready to make that move.

It went up almost 13 cents/mcf on Friday; and is up 9.5 cents today at 11:45AM Mountain time, while crude oil has gone down $2.56/barrel. This could be yet another head fake, but NatGas is definitely overdue to break out of its extended dormant state.

Another Reason To Be Wary of the Stock Market...

2011-03-14T23:08:00.000-07:00

Unfortunately, we're seeing it play out in Japan on the Nikkei index, which plunged over 13% in today's trading with two hours left in the session.

My thoughts and prayers are with the families of those who perished, and those who are suffering through health challenges. The loss of life and health concerns from the aftermath of the tsunami and nuclear accidents are a much bigger priority than investment losses.

These events in Japan remind me why I prefer tangible assets to financial paper assets (unless you're a nimble trader who can get in, take your profits and get out). The ultimate collateral a holder of financial paper assets has is the public's confidence in those assets.

When a financial crisis or natural disaster hits and undermines that confidence, it lowers the value of those paper assets and usually (assuming no government intervention and a free market) takes a long time for that confidence - along with related asset values - to come back. As we've seen with Enron, MCI and other dot.com graveyard stocks, sometimes it never does.

The Nikkei has lost 23% of its value since February 21st, less than a month. That reinforces my belief that the stock market is not a "safe and secure" place for your money. The US stock market is a high-risk, low-reward proposition for every American who doesn't understand the fundamentals of the economy, and the companies of the stocks they invest in.

I believe that gold and silver mining and agricultural commodities are probably the best sectors to invest in for the longer-term. However, there's no guarantee that over the next few months and years we won't see significant and sharp downturns (similar to the recent plunge in the Nikkei) in every investment class - commodities and stocks included.

Any average financial planner or advisor who says: "Stay in the stock market for the long term" should have their head examined.

Anyone who understands what's going on politically, financially and economically realizes we're in uncharted waters - we've never had these levels of debt, unfunded liabilities and government spending in the history of the United States.

It will take at least several years - and probably a decade or more - before we come close to resolving these debt, spending and liability issues. In the meantime, you should learn to invest for cash flow instead of capital appreciation... unless, you're a skilled stock, options or commodities trader who knows what you're doing.

Bernake's Debacle: The Law of Unintended Consequences

2011-03-03T09:50:00.000-08:00

One of my favorite economic and political laws is The Law of Unintended Consequences. It's what happens when a policy or statute is enacted, and something else happens that the folks who originated these actions didn't anticipate.

Case-in-point: Ben Bernanke's "Quantitative Easing II" (aka money-printing on steroids) was designed to boost economic activity and spending here in the U.S., and get America's economy back to "normal" (i.e., borrowing and spending like the good old days of the stock market and real estate booms - or as close to it as possible).

There's one little problem that "Helicopter Commander" Bernanke overlooked - the unintended consequences of excessive money-printing around the world, and how it would affect America's foreign policy.

One of the few practical things I learned in college was from an Ag Policy professor named Dr. Barry Flinchbaugh. He was a quick-witted, heavy-set guy who liked to smoke cigars, and told great stories. As a result, I never fell asleep in his class - even though it was right after lunch.

The quote Dr. Flinchbaugh said that stuck in my mind was (to the best of my recollection):

"The only way that policies get enacted or laws get passed, is when they're both politically and economically feasible."

The corollary of that quote is that policies get reversed (or laws get repealed, which is very rare) when they're not politically and economically feasible. It looks Ben Bernanke is close to proving that corollary with the Fed's monetary policy.

QE2 skyrocketed food prices here in the US and around the world, and it's why you're seeing political unrest in the Middle East. People are angry because food has gotten outrageously expensive, and people in Egypt, Tunisia and other neighboring countries pay a much higher percentage of their income on food.

When people's bellies start growling, they get mad and take to the streets. Or as Gerald Celente says, “When people have nothing left to lose, they lose it.” And recent events in the Middle East have thrown a major monkey-wrench in the United States' foreign policy in this part of the world; and I believe it's on the verge of spreading to America. What was supposed to be economically feasible and positive in the US, has turned out to be politically unfeasible and volatile in the Middle East/North Africa.

Egypt had the misfortune of pegging their currency to the US Dollar in 2005. The Unintended Consequence they didn't anticipate, was that our Federal Reserve Chairman would be a monetary madman, doing his crazy money-printing experiment in the real world – where real inflation would lead to really bad consequences.

Although Bernanke claims to be a student of the causes and effects of the Great Depression, he's terribly wrong about his conclusion that the reduction in money supply and the fiscal restraint of the gold standard were the causes. Since the inception of the Fed in 1913, it did just the opposite – from February to July 1932, it purchased $1.1 billion of government securities (sound familiar?) to a total holding of $1.8 billion, while total bank reserves were only $212 million.

The gold standard provides a fiscal check and balance on governments, and takes away the temptation of excessive borrowing and spending. And history is littered with examples of failed fiat currencies (backed only by government decree) that allowed profligate government spending, and destroyed the wealth of its citizens. Take post-World War I Weimar Germany, for example.

Burdened with crushing war debts, the government cranked up the printing presses to pay them back with less-valuable German marks. In 1919, one US Dollar was worth 12 German marks. After just a few years of consistent money-printing, the exchange rate went parabolic with one US dollar equal to:

November 1921: 263 marks

January 1923: 17,000 marks

August 1923: 4.621 million marks

October 1923: 25.26 billion marks

December 1923: 4.2 trillion marks

Eventually, Germans were using stacks of their currency to heat their furnaces. As the Daily Reckoning reports, currency devaluations and hyperinflations aren't isolated or historical events. More recent examples of currency crises are: Mexico's "Tequila Hangover" in 1994... Thailand 1997... Russia 1998... Argentina in 2001... Zimbabwe in the 2000s.

Mark Twain said, “History doesn't always repeat itself, but it often rhymes.” And I'm hearing a very familiar tune in the US.

Bernanke and the Fed are walking a fine monetary line. If they don't keep pumping money into the system to keep "zombie banks" alive, credit will contract further and many banks will fail... and America will have to take some harsh economic medicine. If they stay the course, they risk even higher food prices everywhere around the world, more civil and political unrest in the Middle East, and a Treasury bond and currency crisis here at home. And America will take some harsh economic medicine.

Almost all Republicans and Democrats don't seem to have the stomach to make the tough spending cuts at the state or federal level. They want to continue to "kick the can" down the road, get re-elected and have someone else make the tough calls. And the Fed seems hell-bent on increasing the money supply in an attempt to keep what's left of the economic party going. But the unintended consequences of putting these decisions off, are more economic pain for the federal and state governments and American citizens in the future.

Like the mechanic said in the Fram filter TV commercial: "You can pay me now, or you can pay me later." I'll add my twist to that: Politicians will have to make tough decisions now, to avoid making tougher decisions later... or they may have to make both.

My hope - for the sake of our country - is that our leaders make these tough decisions sooner, instead of later.

State Budgets, the VIX, and the Stock Market

2011-01-21T16:47:00.000-08:00

On the surface, the stock market looks OK - going up slowly but surely, with the Dow closing in on the 12,000 mark. I'm a little wary because this week the Volatility Index (also known as the VIX), went up from 15.5 to 18.5 - about 20% from Tuesday through Friday.

There's an old saying when it comes to the VIX: "When it's high, you buy - when it's low, you go (sell)." It's been low and dormant for a long time, but it looks like it's waking from its slumber... and ready to go much higher.

I don't see ANY fundamentals holding the stock market up at current levels, other than High-Frequency Trading from investment banks and maybe some help from the Fed. State budgets around the country are bleeding red ink from deficits and debt - and in Illinois, their only remedy seems to be a financial transfusion of money from taxpayers.

When the New York Times runs a story about states looking to possibly file bankruptcy, the economy is not as rosy as economists like Brian Wesbury would have you believe.

Just like in 2007 when the Dow reached its peak of over 14,000, that didn't mean the economy was fundamentally sound. It was heavily laden with debt, and at the climax of the biggest misallocation of money in the history of the world. The biggest problem I have with Wesbury's hypothesis is that because Republicans have control of the House of Representatives, this will magically improve the economy.

I want to be optimistic about the overall American economy, but when I look at the mountains of debt at the federal, state, corporate and household levels, I seriously doubt we'll ever repay these obligations. Default is the more likely option for municipal bonds and defined-benefit pension plans. Until these debts are paid back or defaulted upon, we won't see Honest-to-Pete savings and investment for a very long time.

And I don't believe that enough Republicans in Washington (or most state capitols) have the gumption to make the necessary cuts. Almost all politicians care about what's best for them, and getting re-elected. If they make these needed cuts, they'll piss off a key campaign donor or special-interest group... and they can kiss their office goodbye. So they'll tinker around the edges, and find solutions that will try to "kick the can" down the road and further postpone the day of financial reckoning.

What does this all mean for the stock market? Unless the investment banks and powers that be can keep levitating the market at current levels, I believe it's headed for another leg down. State pension funds will sell the most liquid assets in their portfolio (probably stocks and mutual funds) to shore up deficits, and keep making payments in the short-term.

I do see opportunities for short-term traders who are nimble enough to get in and get out of the markets, and take their profits. And a few for long-term investors who know the right industries and companies to pick. But over that long-term horizon, we could see a roller-coaster ride of volatility that could shake you to your core.

If you still want to invest in the stock market, you need to have a high risk tolerance... strict money management rules in place... and stick to those rules consistently. Tray tables and seats in the locked and upright position, folks - it's gonna be an interesting ride.

Thoughts on Commodities...

2011-01-18T22:02:00.000-08:00

I've thought about my prediction for the price of wheat, which is... we'll see Hard Red Winter Wheat at $10.00/bushel or higher by Labor Day. As they say in the NFL: "After further review..." I think it's entirely possible we could see this occur by Memorial Day, or even May Day. Here's why:

Floods in Australia, drought in Russia, and dry conditions in the U.S. Central Plains - plus the Federal Reserve's insane "Quantitative Easing II" policy (aka, money printing on steroids) all look like rocket fuel ready to explode the price of wheat higher.

The Fed's insanity has increased and will continue to increase the price of other commodities, such as crude oil, natural gas, gold and silver. I've been considering what factors could prevent this explosion in commodity prices. The only things I can think of are sharp cuts in government spending, and a Paul Volcker-style interest rate shock treatment. Watching what Ben Bernanke says - and more importantly, what he's done - it's pretty obvious that Ben is no Paul Volcker.

He seems hell-bent on printing money, while the Congress is hell-bent on spending it. Even with Republicans taking control of the House, I don't see politicians at the federal (and most state) levels having the gumption to seriously address government spending, entitlements, and most importantly... state and municipal pension plans, which have huge unfunded liabilities.

Not to mention Social Security and Medicare at the federal level.

Could we see some downward corrections in the short term? Absolutely.

Markets can - and usually do - act in irrational ways in the shorter term... but always trend according to the fundamentals in the long-term. Easy money, tighter supplies and crazy government spending are why I'm bullish on commodities for the foreseeable future.

Dot.Com Fever, Part II?

2011-01-03T16:07:00.000-08:00

Karl Denninger has an interesting post about Facebook receiving $500 million in cash for part ownership in the company. I'm not as negative on the company as Karl is, because they have several streams of revenue (games and applications such as Farmville), in addition to ads they sell on a per-click or CPM (per thousand views) basis.

He poses a good question about how good an investment Facebook really is, when it's a privately-held company that doesn't release its financial results: If the company is doing so well, why did they take the $500 million from Goldman Sachs and the Russian investor?

In September 2009, Facebook announced they were cash flow positive, which is good. The next question savvy investors should ask: "Is Facebook STILL cash flow positive?"

Time will tell how good a financial investment Facebook will be. I do like it better than the over-hyped Twitter for a number of reasons. Before I list those reasons, in fairness, I will give the positive side of this social media site: Twitter (if used correctly) can help you build a marketing list, and broadcast your marketing message to a large audience.

However, too many business owners seem to think that Twitter is a business "cure-all" that will cover up a flawed business model, or a bad product or service. You have to "tweet" and "re-tweet" your messages multiple times to get people's attention.

If any of your followers follow more than several hundred people, it's pretty easy to get lost in the shuffle. And to send these multiple messages daily, it takes valuable time that may be better spent on other tasks or marketing media.

Facebook is easier to navigate, allows more conversations and interactivity between users than the Re-Tweets on Twitter. 160 characters just isn't enough to have a decent conversation.

And I hated all the hype about Twitter, because anytime something is hyped up so much... it can almost never live up to that hype, and most of the time, the underlying fundamentals aren't that impressive.

When looking at a business to invest in as a shareholder or owner, you need to ask difficult questions to make sure you're making a wise purchase.

And when a supposedly intelligent business owner says something stupid, I won't hesitate to criticize them for it. Last November, one of Twitter's co-founders announced they were "exploring different business models."

Huh?!

OK... call me crazy, but shouldn't you decide on a business model before you start the company? I believe Mark Twain said: "History doesn't repeat itself, but it often rhymes." These business tunes sound a lot like the "one-hit wonders" of the late '90s dot.com era, when people were buying stocks of companies who had never made a dollar of profit - much less had a realistic, viable business model.

Twitter also raised $200 million in new funding, along with the $100 million in venture capital that T. Rowe Price and other investors ponied up in 2009.

Along with Twitter, we're seeing companies like Four Square raise venture capital - just like the dot.com days. It raised $20 million last June, and the investing company claimed that Four Square was worth $95 million.

Opinions on company valuations are a dime-a-dozen, and I don't believe these estimates are based on any solid financial or accounting data.

It seems like venture capital firms and Wall Street want to blow up another investment bubble to cash in on, and investors want to get in on "the next big thing." And both want to see some signs of growth and good news in the economy.

If you've spent any time on Facebook or Twitter, and connected with family, friends or business contacts, there are intangible benefits you receive from interacting on these sites. Such as re-connected with old friends and family - and sometimes the tangible benefits of finding a new client, or making a sale.

But for investors who want to put their hard-earned money into Facebook, Twitter or similar companies, and expecting a great return on that money - remember this: Caveat Emptor, or "buyer beware."

Time to Bail From 401(k)s

2010-11-10T22:49:00.000-08:00

Looking at the stock market and economy, I don't see any reason anyone with a 401(k) plan should stay invested with it for the foreseeable future. Most of the choices in these plans are either mutual funds, money market accounts and/or annuities. Neither of which are very appealing, when Ben Bernanke has unleashed monetary hell with Quantitative Easing, Part II.

Here are the reasons why I'm not a fan of any of these investments:

1) Mutual funds only go up in value, when the stocks they're invested in go up in value. The fundamentals underlying the American economy and stock market are pretty lousy: High unemployment, plus large amounts of debt at all levels of business and government. Having said that, stocks could go up if QE2 takes hold - however, I doubt that the increase in stock values will outpace inflation. My guess is that at best stocks will keep up with the higher (and soon to be hyper) inflation rate.

2) Money Market funds don't pay a lot of interest, and aren't safe - especially when the Fed is debasing the currency. After taxes and inflation, savers will be net losers in money market funds, bank savings and CD accounts.

3) Annuities are future promises to pay a sum of money over a period of time. We know that Wall Street firms and the government can keep promises... and also break them. If you're retiring in 10 years or more, and believe that you'll see every penny of Social Security you have coming to you - I've got oceanfront property in Wyoming for sale. In theory, annuities are supposed to be invested in certain assets that will make a given rate of return over time. However, I don't have much faith that the financial assets annuity companies invest in will provide a great rate of return.

4) The longer-term trend of Baby Boomers retiring, will have more sellers than buyers of stocks, mutual funds and other financial investments. Boomers investing in Wall Street from 1982 until 2000 helped fuel the secular bull market in stocks. Conversely, retiring (and stock-selling) Boomers will contribute to the secular bear market through at least the late 2010s.

My advice to anyone who has a stock-based IRA or 401(k) plan? Take the tax hit and SELL - immediately. The more money and assets that you have in your possession, instead of a bank or Wall Street firm, the better.

If you have money with any garden-variety financial planner or stock broker who says "stocks will always work out in the long term," you should fire them on the spot. Anyone who knows what's really going on with the markets and the economy understands we're in uncharted financial waters. This isn't your father's - or even your older brother's - economy or stock market.

Karl Denninger says it best: "Lots of money to be made (in the stock market) if you're quick and good, but an absolute minefield if you're a long-term investor."

Invest some of your money in physical gold and silver as dollar and inflation hedges; and if you don't have the trading "chops" to get short-term profits from the stock market, find a stock, options and/or FOREX trader who can do it for you. Single-digit returns in a savings, CD or money market account won't keep you ahead of the not-so-hidden tax of inflation.

That's why you must find ways to get consistent double (or even triple)-digit returns on your investments, to stay ahead of increasing taxes and inflation.

Where QE2 Could Lead the Economy

2010-11-08T19:00:00.000-08:00

Unlike most mainstream financial analysts and pundits, I don't believe that the Federal Reserve's latest actions to revive and stimulate the economy will have positive results. When you think about what the Fed is doing (printing money out of thin air, to purchase Treasury debt because foreign demand is drying up), the longer-term consequences don't appear to be good.

By increasing the money supply, the value and purchasing power of the U.S. Dollar will eventually decline. Prices of food and energy are bound to increase - and conversely, I see real estate, automobile and other big ticket items going down. Why?

If Americans spend more of their income on the necessities of life, there won't be as much disposable income to pay for (or invest in) boats, cars or real estate. Commercial real estate is faced with the double-whammy of recovering from an over-inflated real estate bubble... and entering an era where more businesses can be operated from a home office or basement.

Consider this: If you can setup a website that will take payments, fulfill a product or service - and it's not location or employee-dependent - why should a savvy business owner invest in leasing or buying a brick-and-mortar facility? Not to mention paying utilities, insurance and overhead.

QE2 will have the same effect as a bartender giving a drunk 3 more shots of Vodka and Red Bull at last call - when instead, our inebriated friend should stop drinking so the detoxification process (also known as the hangover) can start as quickly as possible.

Unfortunately, most Americans are like the late-night drunk, not wanting to admit that the credit party should be over and they should get off the sauce ASAP. The 2008 stock market and real estate crashes were the start of the hangover. The Fed should take away the punch bowl, let the economy go into "detox" mode, and a quicker financial recovery will ensue.

However, it doesn't look like Benny and the Feds will do the right thing - and instead, these financial bartenders are trying to keep the party going as long as possible. This could provide some short-term benefit, but it'll delay a longer-term economic recovery. While there are still opportunities to make money and prosper in any economy, I see the overall American economy as sluggish for the short to medium-term, maybe even a decade or longer.

It all depends on how quickly the massive amount of debt Americans have at the federal, state, corporate and household level is repaid or defaulted on (probably more of the latter than the former). QE2 does nothing more than increases debt and money supply, which is what ultimately caused our current recession/depression in the first place.

Diary of a Monetary Madman

2010-11-05T20:21:00.000-07:00

That's what I would call "Helicopter Ben" Bernanke's latest ramblings from this week's Federal Reserve meeting. The 2nd round of Quantitative Easing (or money-printing on steroids) is supposed to kick start the economy back to health.

The only problem is that excessive money creation and debt is what caused our current recession/depression. Both Republicans and Democrats around the country seem to be debt junkies who don't want to go "cold turkey," and start the process of the long financial hangover - which will be the start of a true economic recovery.

Many Americans still believe that the Fed and the federal government have the power to bring the economy back to health. In reality, the best thing they can do is quit trying to "help," and get the heck out of the way so the real recovery can begin.

The Long Financial Hangover

2010-10-28T11:27:00.000-07:00

I think most Americans are coming to the realization that this recession/depression we're in will be around for awhile. People aren't as likely to believe the Wall Street cheerleaders on CNBC and the lamestream media like they did back in the mid-2000s.

Government and media have perpetuated the myth that the economy is like a big machine they can tune-up to make it run better. Push this button, pull that lever, jigger a switch - and voila! The economy will be back on track and good as new.

The fact is that the economy is more like a living organism than a machine. When you feed it too many stimulants or drugs (fiat money, easy credit and short-term tax incentives), eventually it needs a break to "detox" from the stimulus.

With the huge amount of debt at the federal, state, corporate and household levels that need to be flushed out of the system - either through default or repayment (more likely the former than the latter) - before we can truly see economic recovery.

This could take a long time. A trusted source of mine mentioned that a friend of his had a long-term government contract (more than 5 years) with an agency that works with banking institutions. That tells me the government doesn't believe this financial "hangover" will end quickly or easily.

And you shouldn't either. There will be opportunities to make money and prosper in the years to come - probably not in the places that you found them in previous years. Be prepared to look for and act on new opportunities in new markets, like a vigilant surfer. The "waves" of opportunity will probably have smaller windows, but they'll be good ones nonetheless.

The Future of Gold and the "China Put"

2010-03-22T22:23:00.000-07:00

Lot of people have takes on the short-term price action in gold and silver. Some say it'll go up, some say it'll correct back down - good arguments are made on both sides.

My focus is on the longer-term fundamentals and trends, and I've been good at predicting them the past several years. Here's the economic scenario America faces:

We're heavily indebted and won't be able to grow our economy enough to pay off our national debt and unfunded liabilities, like Social Security and Medicaid. So the federal government and Federal Reserve (which really isn't federal) have decided to crank up the printing presses and try and inflate our way out of this mess.

The problem is that it devalues the purchasing power of US Dollars, and the wealth of Americans who save and invest in US Dollars. Foreign companies and governments holding large quantities of dollar-denominated debt (like U.S. Treasuries) want to get out of this type of debt so their wealth doesn't decline either.

China is the world's largest holder of US Treasuries, and is now a net seller of Treasuries instead of a net buyer. And last September, the Chinese government recommended to its one billion citizens to invest in gold and silver.

With this kind of strong demand for gold and silver, this makes me even more bullish on the longer-term prospects of precious metals. That's on top of my bullishness because of absolutely insane monetary policy from our Federal Reserve. Put options allow you the right to sell a stock or product at a given price, on or before an agreed-upon time. This eliminates the downside risk if the stock or commodity you've purchased goes down in value.

When a country with the population and increasing wealth of China is focused on buying gold and silver, that's the biggest put option on the planet today with the least downside risk. Now - can the price of gold go down in the short-term? Absolutely.

We could see another round of deleveraging like we did in the fall of 2008 - where investors were hit with margin calls, and needed to sell everything possible to raise cash for short-term obligations. Eventually, investors in America and around the world will turn away from financial paper assets, and look to invest more in tangible assets such as gold and silver.

It's not a guarantee that they will "always" go up in value. However, tangible assets always hold some value - and have never gone down to zero throughout the history of the world. And with the kind of demand that China has for precious metals, I believe that these so-called "barbarous relics" are among the safest places you can invest your wealth in the turbulent times we live in.

Why You Shouldn't Contribute to a 401(k) Plan

2010-03-16T00:48:00.000-07:00

What I've said may sound like heresy to most people, because it goes against "conventional financial wisdom" (which really isn't wise) and everything you've heard repeated from friends, family and the media.

However - in the next few minutes I'll make the case for why you shouldn't contribute to a 401(k), and you can judge for yourself. Here are the reasons why:

1) A 401(k) is a good savings plan - NOT a good retirement investment plan. Even with matching employer contributions, most plans only offer stocks or mutual funds to invest in. And if the stock market doesn't go up, your account won't either... and you won't have a comfortable nest egg for your retirement. Betting on the stock market to keep going up in these times is far from a sure bet.

2) Most 401(k) plans don't give enough investment choices. Most plans offer a basket of mutual funds to choose from, and I'm not a big fan of mutual funds. Why? Because they have annual fees that whittle away the value of your portfolio over time. And mutual funds only increase in value when the value of the stocks they're invested in go up.

3) 401(k) plans tie up your money until you get to retirement age. In the meantime, you could invest these funds in alternative investments that could provide passive income (and/or capital gains) - such as real estate (bought at a reasonable price/terms), buying or developing a business, or trading stocks, options and/or FOREX accounts.

4) The declining value of the US Dollar means that you'll lose purchasing power with all dollar-denominated assets. If - or more like when - the US Dollar declines further in value, it's a "stealth tax" on your wealth. The only way to hedge against a dollar decline is investing in tangible assets, such as physical gold and silver. Your portfolio will be a sitting duck if its in financial paper assets.

Some 401(k) plans allow investors the option to put their money in whatever profitable investments they want - such as residential/commercial real estate, precious metals and tax lien certificates - and that's good.

I prefer the "Rich Dad" philosophy of Robert Kiyosaki, where you develop one or more businesses or assets that provide recurring passive income that will take care of your in your golden years.

Kiyosaki's latest Yahoo column shows the "Lost Decade" where most investors in stocks didn't make that much on Wall Street-based investments. This is the biggest problem I have with financial media including CNBC - they always tout stocks and promote the stock market. Always telling you when to buy, but almost never when to sell - until its too late and the stock has plunged in value.

This is my two cents - and then some - on 401(k) plans. Leave a comment below whether you agree or disagree, and explain your position.

Why There's No Such Thing As a Safe Investment

2010-01-20T08:50:00.000-08:00

I thought about the phrase "Risk-Free Investment" after I met with a couple at a networking event. We chatted a little bit, and the wife asked me what I did and specialized in.

I mentioned that I have a strong interest in financial markets and investments. She asked me what a "safe" investment was today. My response may have been a little too blunt; however, it's the same one I'll give you right now: In today's economy and financial markets, there are no safe investments. The best investment you can make is in your financial education.

Americans have been conditioned to "buy and hold for the long term," and dollar-cost average into a well-diversified portfolio of stocks, bonds and mutual funds. And if they do that, their retirement will be hunky-dory.

Unfortunately, the Dot.Com Bust and the Crash of 2008 blew that theory to smithereens. With the stock market bouncing 60% higher off the March lows, investors are breathing a sigh of relief. Other investors are parking their money in supposedly "safe" CDs or savings accounts.

However, in today's economy and markets, there is no such thing as a "safe" investment. Even if you make 1-2% in a savings account or CD, inflation is much higher than this - and in real (inflation-adjusted) terms, you're losing purchasing power and wealth.

What about the supposedly "safe" stocks and mutual funds, and "sticking with your long-term plan" like a financial planner or broker tells you? The problem with the long-term "buy and hold" strategy is the rate of change in the business world. There aren't very many so-called "blue chip" firms anymore - and the few that are today, may not stay blue in a few years.

If you still believe that the U.S. stock market is the best place for your money, you may want to read this article by Matt Taibbi, which describes Wall Street's Naked Swindle.

With any rule or statement, there are a couple of exceptions. Two investments that I believe are "safest" today - and two you should buy and hold for the long term: Physical gold and silver bullion. Richard Russell has a great article, how you can Learn From the Rich Man.

People who put their confidence - and leave their wealth - in paper instead of real assets will be very disappointed in the years to come.

Democrats Acting Like Thelma and Louise

2009-11-05T07:38:00.001-08:00

You probably know the ending of the movie Thelma and Louise, where they find themselves cornered by the police. Seeing no way out from getting arrested, they hold hands - gun the accelerator, and drive the car off the cliff.

Democrats in Congress seem hell-bent on doing the same thing with their political party - and the American economy - with the so-called "health care reform" bill, H.R. 3962. They see a small window of opportunity to pass the socialist utopian legislation they've dreamed about for decades.

Nancy Pelosi, giddy with excitement - but severely lacking in financial, economic or Constitutional literacy - is collectively holding hands with other Senators and CongressCritters, putting the petal to the metal and ready to push 1/6 of the American economy off the proverbial cliff. Even though our health care system does need reform, it should come from the "invisible hand" of the free market - not the heavy hand of goverment.

I'll readily concede the health care system in our country isn't perfect. Services are usually too expensive to pay for out-of-pocket, and it's too heavily weighted towards prescription drugs and surgeries - versus preventive medicine (which I prefer), such as chiropractic adjustments and taking nutritional supplements. Government's track record of running enterprises successfully - compared to the private sector - has been pretty dismal.

The U.S. Postal Service has been in business for over 230 years, and still can't turn a profit. Compare the USPS to Federal Express, which has been successful in less than four decades.

So-called "experts" proclaimed back in 1965 that Medicare Part A would only cost $9 billion by 1990. Obviously that figure was grossly underestimated, and costs many times that today.

Compare this to the President's claim that this so-called health-care reform will be "deficit neutral." Yeah, sure Barry - now pull my other leg, it plays Jingle Bells. It's obvious that whatever is said from almost all politicians in Washington D.C. (with the exception of Ron Paul) should be taken with a shaker of salt, and assumed false until proven true.

This kamikaze political maneuver by the Democrats is accelerating their rush to make America a socialist country. They may also be accelerating the end - or at least the beginning of the end - of the two-party political system. The Dems will ram and jam this "health-care reform" through Congress, and Americans will see the bitter fruits of their labor in the next few years.

In the past, Republicans would benefit from this, seeing the political tides turn back their way - at least for the short-term future. However, I don't see this happening like it has in the past. George W. Bush and other neo-conservatives have so badly damaged the credibility - or the "brand" - of the party, that more and more people (yours truly included) are looking for an alternative to the two-headed, one-party system, as Gerald Celente calls it.

The NY-23 Congressional race is a perfect example of voters' disgust and distrust of politics as usual. It's amazing that the 3rd-party candidate - Conservative Doug Hoffman - garnered about 45% of the vote, and almost won. Even with the endorsement from GOP leaders like Michael Steele and Newt Gingrich, Republicans gave Dede Scozzafava a resounding rejection because of her radical political views.

The Chinese saying "May you live in interesting times" can be both a blessing and a curse. That's what I see both economically and politically for America in the coming years. The stock market and economic implosion the past couple of years is just the opening act. We'll see plenty of financial and political fireworks in the years to come. The Democrats' bad political theatre is the start of Round 2 of these "interesting times." Tray tables should be in the locked and upright position, and seat belts securely fastened.

Financial Crackheads on Parade

2009-09-16T20:18:00.000-07:00

Today I came across two of the most insane takes on economic policy that I've heard in 2009. The first one came from Ken Fisher, who said we'll see HIGHER debt levels in the future, our country has been "under-indebted" in the past, and the US is and will be "less under-indebted" in the future.

Excuse me, but wasn't this massive orgy of credit, debt and spending what got our country INTO this financial mess in the first place?!

Fisher predicts that US debt will increase to 500% of national GDP in the future. Then he has the audacity to say: "People have a hard time believing that we actually could be under-indebted."

Yes, Ken, include me in that crazy crowd who believe that you never have been, and never will be able to borrow yourself to prosperity. Did GM and Chrysler file bankruptcy because they were "under-indebted?" No, they were OVER-indebted with borrowing costs, and legacy costs because they kowtowed to outrageous union demands, and were poorly managed. Not to mention not keeping up with current trends, and what Americans wanted in cars and trucks.

I can't believe that someone who manages money for clients in today's market actually believes this. My hunch is that he's been compensated to encourage Americans to borrow and spend some more to try and keep the economic good times rolling.

The second example of economic stupidity is Larry Kudlow - the supposed self-proclaimed capitalist - who supports the Cash For Clunkers program. How come?

"But unlike most of the rest of the fiscal-stimulus plan, this program actually works because the federal cash rebate actually contributes to a consumer purchase. It's not just another welfare-type transfer program."

Didn't excessive consumer borrowing, spending and PURCHASING lead to the economic pain we find ourselves in today? I'll grant the fact that consumer purchases in a totally un-manipulated free market are better than transfer payments of any sort by the government.

However, the stock market and residential real estate bubbles were CAUSED by government involvement, and the Federal Reserve printing money like there was no tomorrow... plus lowering interest rates to the floor. Not to mention the virtual elimination of lending standards, which allowed almost everyone to buy a home.

Americans became over-leveraged, sub-prime mortgages blew up, and when the economy and job market turned down over the past few years, it even affected some people who had great credit (but were still overextended), with no financial room for any hiccups in their incomes.

"...the price tag of the program is a mere $2 billion compared with the trillions of dollars Washington has been wasting. So, for once in our lives, Washington spending is giving us a good bang for the buck."

Sorry, Larry, I can't buy that logic even for a dollar.

A true free-market capitalist wouldn't encourage ANY government involvement in ANY market - whether its cars, cows, or computers.

Larry, I know you want to the see the stock market rise in value forever through your perma-bull rose-colored glasses. However, the mistakes our leaders and most consumers have made over the past decade or so is finally catching up with us.

The financial piper is being paid, and it'll take a long time to pay this debt off in full.

A "New Normal" For Investors

2009-09-08T18:42:00.000-07:00

I get the sense from talking with people about the economy and the stock market that they're pining for getting things 'back to normal.' When they could depend on stocks and mutual funds going up for the longer term... high-paying jobs were plentiful... and there was relative peace and prosperity in our country.

Unfortunately, those days are just about over. China, Russia, Brazil and India are the new growing economic powers rich in manufacturing and resources; while the United States has morphed from the world's largest creditor nation that produced everything it used, and had the world's reserve currency; into the world's largest debtor nation that manufactures very little.

The value of the US Dollar has and will continue to decline because of insane levels of federal spending and borrowing. And sometime in the next few years the Greenback will no longer hold the title of World's Reserve Currency. Because of these declining fundamentals, I don't see the US getting back to the old normal anytime soon.

What we'll see is a "New Normal," or baseline that Americans will have to adjust to. As Jim Rogers has said repeatedly since the late 1990s, commodities have been - and will be much better investments for the short-to-medium-term future; probably until the mid to late 2010s. American stocks will be mired in a longer-term secular bear market, at least until the end of the commodities bull market cycle.

The last half of the 20th century has been a rare period in American and world history where a country and continent had unprecedented peace and stability. I believe that it's spoiled and fooled a lot of Americans into believing that ever-increasing home and stock values are their birthright, and they shouldn't have to endure bear markets, recessions or depressions. Now it looks like the US has (or will experience, depending on your point of view) all three economic specters.

Investors MUST start taking control of their financial future, and not leave it up to their "trusty" stock broker or financial planner. They need to start investing for cashflow, not just capital gains. This will be a necessity for Baby Boomers and other Americans to learn - and not an option - if they want to maintain and increase their wealth into the 21st Century.

The days of passive, buy and hold (or as I call it "buy and hope") investing are over. Get educated, get financially literate, and get in control of your investments and financial future. This is the only way Americans can deal with the New Normal coming our way.

Perils Facing PERA and Other Pension Plans

2009-08-14T08:16:00.000-07:00

I did an interview about Colorado's public employees pension plan (known as PERA) with Brad Jones of Face The State, a news site that covers political events in Colorado.

PERA's administrators are doing a statewide "Listening Tour" to get input and feedback from Coloradoans about what should be done to close PERA's $17 billion gap in unfunded liabilities. As I researched the topic, talked about it with Brad, and thought about possible solutions; there are really no easy answers.

In theory, PERA's investment portfolio is supposed to grow at a large enough rate in order to cover the obligations for current and soon-to-be-retired public employees. That theory was blown to smithereens last year, as the net asset value of PERA took a 26% haircut in 2008 from the stock market crash. The ugly financial results are on page 17.

It's structurally flawed, because PERA is paying out $1.89 in benefits for every $1 paid into the plan. In 2008, the contribution/benefits deficit was about $1.3 billion, this year it's on pace to hit $1.47 billion.

So what are the possible solutions to "save" PERA? They're similar to what will probably happen with Social Security, with the exception of means testing:

1) Increase in the minimum retirement age. This is a no-brainer, as the current formula allows some employees to retire in their 50s, and could have 20-40 years of paid pensions. Nice gig if you can get it, but its not financially sound policy.

2) Freeze and/or reduction in annual Cost of Living Adjustments (COLA) and defined benefits. This won't be popular, but I don't see any way around it. At the minimum, PERA should implement a "COLA Holiday" for at least 2-3 years. It won't close the gap entirely, however, it would be a good start. Benefits promised to new employees under 40 will have to be reduced.

The myth of the Industrial Age, defined-benefit pension plan is being exploded. That's the reason why 401(k) and IRA plans came into vogue in the 70s and 80s, because big companies knew they couldn't afford these pension liabilities and still stay in business. State employees who still have this entitlement mentality that they deserve to be taken care of in their golden years because they were a loyal public servant... well, they need (and will be getting) a serious reality check soon.

3) Change how the investment portfolio is managed. The "buy and hope" theory of investing doesn't work anymore. The administrators should hire a team of great investors and/or traders, pay them a small fee and base most of their compensation on performance. In other words, if they don't make the plan money, they won't get paid. The idea of paying a financial planner or money manager a flat fee, regardless of how your portfolio performs is a joke.

The only chance that PERA has of staying solvent in the next decade or two is generating significant investment income. The administrators should (at the minimum) reduce exposure to US stocks, and increase it for well-selected, well-managed stocks of foreign companies.

They should also look at investing in FOREX and options markets, and increase the asset allocation of precious metals. Changing market conditons require a different investment strategy - and what's worked the last 10-20 years probably won't work the next decade or two.

My interview is towards the end of the weekend podcast at www.FaceTheState.com. Thanks to Brad Jones for the opportunity to talk about this important issue; and if you live in Colorado, make your voices be heard by filling out this PERA survey.

Peter Schiff Was Right, Ben Bernanke Was Wrong

2009-07-23T17:40:00.000-07:00

This should be obvious by now, but this video and this video on YouTube proves the point beyond a shadow of a doubt. Now, Schiff hasn't been perfect on the timing of some of his investment recs; however, on the fundamentals he's been rock solid.

In contrast, "Helicopter Commander" Ben Bernanke has looked like a total shill and a fool. He studied the Great Depression in detail while he was at Princeton, and unfortunately, he got the cause and effect totally wrong. The Federal Reserve helped cause the 20th Century's greatest economic downturn - and it didn't help the economy recover. Expanding the money supply by printing more dollars doesn't increase prosperity, it increases inflation - and acts as a hidden tax on an individual's wealth.

Our country desperately needs to have our currency backed by gold, instead of the "full faith and credit" of the federal government - which is rapidly declining around the world. Until that time, you should avoid most financial paper assets (stocks, bonds, mutual funds, etc.) - UNLESS you understand the companies and trends well, and know how to swing trade stocks in the short-term. And save your money in gold or silver bullion.

The secret to Warren Buffett and Jim Rogers' success

2009-06-25T14:11:00.001-07:00

Came across this post at the Daily Crux, and it's some of the best investing advice I've ever came across. Warren Buffett also did this, and it's a big reason for his investing success.

Charlie Munger - Buffett's long-time partner at Berkshire Hathaway - once told a crowd, "Warren was so successful because he sits on his ass and reads." Enough said. Good enough for them, so it's good enough for me.

The 401(k) Hoax, and How You Can Avoid It

2009-06-16T18:53:00.000-07:00

Came across a good website and 11-minute video from Garrett Gunderson - author of the book, Killing Sacred Cows.

I recommend it because I'm not a fan of traditional financial planning, mutual funds and 401(k) plans. And I want more Americans to become financially literate, and not keep buying into financial myths that just aren't true.

The reasons why I don't like 401(k) plans are:

1) They offer limited choices for investors - usually several mutual funds, which only increase in value when the stocks these funds are invested in increase in value. If the market crashes (like it did last fall), your portfolio is in trouble. 401(k) and IRA plans came about in the early 1980s; and that's when the bull market in stocks started. These plans made it easy for workers to put money away, and they were sold to Americans as a supposedly safe way to invest in the stock market.

2) Even with employer matches to 401(k)contributions, and assuming employees consistently contribute to their accounts for 35-45 years, there's still a good chance that they'll outlive their money. If someone developed an asset or a business over several years, they could have a source of passive, residual income for retirement, and not have to worry about the stock market going up.

3) Baby Boomers are starting to retire, and pull money out of the stock market. Boomers' buying of stocks and funds were the primary reason for the stock bull market of 1982-2000. When tens of millions of Boomers start selling stocks and funds instead of buying them, the chances of the US stock market going up again are pretty slim.

But the biggest reason why I don't like 401(k) plans is this:

4) People aren't taught how to become skilled investors. I blame Wall Street and the government for this, because I believe they want ignorant, under-educated people blindly buying stock-based financial products.

How can people avoid the 401(k) trap? Get educated. You DO have choices when it comes to investing. You do NOT have to invest in stocks and mutual funds. Look at precious metals, tax lien certificates, or having a professional trade an account for you on a performance-only basis. In other words, he only makes a profit when he makes you money.

If you just have to invest in the stock market, for goodness sakes, get educated. Listen to Phil Grande at www.PhilsGang.com, or Tom O'Brien at www.TFNN.com. They have weekday live radio shows that are saved as podcasts, so you can listen to them at your convenience.

Listen to wise investing advice from Peter Schiff, Jim Rogers and Dr. Marc Faber; check out the weekly webcasts at www.financialsense.com, www.HoweStreet.com, www.GlobalEconomicAnalysis.Blogspot.com, and www.KEReport.com.

CNBC is a good Wall Street marketing show, disguised as investing advice. Don't depend on it for your only source of investing information. That's all for now, get started on your financial education TODAY.

Why Conventional Wisdom Is Hazardous To Your Wealth

2009-05-12T13:44:00.000-07:00

I strongly urge you to read the chapters in Robert Kiyosaki's new book: Conspiracy of the Rich. It tells you why:

- Your house really isn't an asset
- Investing in a 401(k) could be the worst way to save for your retirement
- Why it's absolutely critical to invest at least part of your portfolio in gold and silver.

Go to: www.ConspiracyoftheRich.com. If you read it, fully understand it, and take the actions that Robert recommends... it's one of the best financial reads of 2009.

What you're being told in the mainstream and financial media is nothing more than Wall Street cheerleading. Yeah, the stock market has gone up about 2,000 points in the past few months. However, the Dow's still down at least 35% from it's peak of October 2007.

And it's still due for another downward correction. If you have any stocks or mutual funds that you hope will go up even further... don't keep "hoping and holding."

Get 'em sold - pronto. And put some of the proceeds into gold and silver.

Bush's - and now Obama's - insane federal spending has bankrupted our country, and a sharp decline (if not outright collapse) in the US Dollar is coming. And probably sooner than you think.

For you and your family's financial future, go to www.ConspiracyoftheRich.com.

Do it TODAY.

Why ETFs Beat Mutual Funds By A Mile

2009-05-06T09:04:00.000-07:00

Larry Rowland of Money and Markets says it best, and I've always suspected this was the case. Mutual funds have plenty of fees, and they only work when the stocks they're invested in go up.

In my opinion, mutual funds aren't safe, and they're the investing version of the horse-and-buggy - soon to be extinct in the financial world.

Will Obama Bring Real Economic "Change?"

2009-01-19T12:55:00.000-08:00

That's the question I hear being bantered about on talk radio and in everyday life. The answer is yes... no... and maybe. I'll explain my cryptic answer in the rest of this post.

Yes, you will see "change" because Team Obama has a somewhat different ideology than Team Bush. And the incoming President is a lot more articulate, and intellectually curious than the outgoing one (although I will give him credit for commuting the sentences of the two Border Patrol agents, Copean and Ramos). However, Team Obama seems to have more faith in the power of government, versus the power of free markets.

(Note: Our current economic and financial challenges are BECAUSE of government intervening in the mortgage, money and stock markets. I'll explain why in a few paragraphs).

The answer to this question is also NO, because the Bush Administration had its hand firmly in allowing financial and economic stupidity to occur. The Federal Reserve lowered interest rates to rock-bottom levels, causing the biggest misallocation of capital to occur in the history of the world.

The government turned a blind eye towards severely relaxed lending standards (and in fact encouraged sub-prime and other lending to folks who couldn't afford the homes they were buying), and the SEC allowed Wall Street investment banks to become overly leveraged to the tune of 40-to-1 (obligations to actual capital ratio). It wasn't a matter of IF this house of financial cards would come tumbling down, but WHEN.

Team Obama seems intent on expanding government even more than the Bush Administration did - and that's saying quite a bit, because the past 8 years have seen the biggest explosion of federal spending and debt in American history. The new Adminstration has a utopian, Keynsian economic view that government should determine where capital and spending should occur.

Bush was never a free-market capitalist of limited-government conservative, just another chip off the ol' Rockefeller Republican, country-club block - and not a very bright one at that. If anything, Obama seems intent on accelerating the intrusion of government into the average American's life (i.e., higher taxes, federal spending, and "voluntary service" in the private and military sectors) and taking us more towards being a socialist nation, instead of the one we've known that's grown and flourished based on free-market capitalism.

I'm not saying the US has been perfect throughout its history, not by a long-shot. But I'll gladly take my chances having more opportunities in a free-market system and nation, than under the false security of socialist rule where my options are limited.

And MAYBE we'll have change for the better in America, meaning a country where government spending and regulation are limited; and fewer bureaucracies are around to regulate what foods and drugs we take, how and where we educate our children, and how much of our paycheck we can take home.

Although it may take awhile, maybe several years and maybe in another presidential Administration... until enough people realize that government has been the cause of our economic and financial problems, and not the solution. That's my dream and hope for 2009 and beyond.

Mutual Fund Investors Need Another Investing Strategy

2008-12-14T18:56:00.000-08:00

This Business Week article sums up why.

Of the 11,585 stock mutual funds that Morningstar tracked this year, all but one lost money - and the sole exception just broke even. I've listened to a great stock trader and radio host named Phil Grande the past couple of months, and he makes more sense than almost anything you hear from the mainstream financial media.

Phil says that almost all mutual funds are going nowhere for the next few years, because fund managers can only invest long in these funds. And the general stock market will struggle in the short-to-medium term future because the earnings aren't there to justify higher stock prices.

The current stock market is a trader's market - not a "buy and hold" market, like most stock brokers and financial planners advise you to invest. Most of the time, their compensation is based upon how much money you have invested in the stock market with a financial professional - NOT on how well your portfolio performs.

And a lot of folks in the industry are still looking for the "best-performing mutual fund" to recommend. That's like recommending the "fastest horse-and-buggy" in 2008. Employees with 401(k) and IRA accounts need to get educated on commodities and exchange-traded funds (ETFs) that will perform better in this current commodities bull market cycle.

Or - take the time to learn how to trade stocks wisely. And that's what Phil Grande shows you how to do. I know it's difficult to learn a new skill, with the time and effort you have to invest. However, if you learn to trade stocks and options profitably today, it'll more than pay off in the next few years - compared to other investors possibly losing their shirts because they didn't know the financial technicals and fundamentals.

I know this sounds like an advertisement for Phil, and maybe it is. However, his advice is some of the best out there. If you're looking for some "done for you" investment advice, check out what Bill McKinley and Doug Newberry have to offer at The Market Toolbox.

Doug also has a weekly webcast every Sunday evening, and their newest edition of the Research Lab can help you make more profitable stock picks in less time. That's something every investor can use.

Had a great time this past week, attending four Christmas parties. Today it was snowy and cold, and a good day to stay inside, relax and watch football.

Please check out Phil Grande and Doug Newberry's sites, they can definitely help you become a better (and more profitable) investor.

The Big Three Bailout Debacle

2008-12-04T18:51:00.000-08:00

I'm no fan of General Motors, Ford or Chrysler, even though my uncle was a GM truck and Pontiac car dealer a few decades ago. I always thought that I'd never buy a foreign car or truck in my lifetime. That was until I realized Detroit wasn't serious about competing in the auto marketplace... at least until they realized they were almost bankrupt, and needed help from Washington to keep their companies going.

Management has had the vision of Stevie Wonder to keep up with foreign car companies, and rising gas prices. They remind me of someone you'd meet at a party who hears a joke, then laughs five minutes after the punch line. The UAW is equally as culpable - they've made unreasonable salary and benefit demands (which management usually capitulated to), and haven't been willing to budge on existing contracts - at least until the threat of bankruptcy and/or going out of business became a distinct possibility.

What's odd about this situation is the debates and delay from Congress, being concerned about $25-34 billion in loans or other assistance, which is a pittance compared to the $850 billion Wall Street bailout that sailed through Congress quickly back in September.

I'm glad to see Congressmen and Senators asking tough questions, and doing their due diligence. Democrats seem to be pushing hard for the bailout, Republicans appear to support the bankruptcy option. I agree with letting these firms fail, and going through bankruptcy proceedings.

If Chrysler had to go through bankruptcy back in Iacocca's day (and feel the consequences of their actions through the pain of restructuring), the Big Three might have paid more attention to their business, and not be in the shape they're in today.

Eventually, these big, dumb, slow companies will have to go out of business, be sold off in pieces, or restructured another way. Their current business model just isn't viable. These companies (or future spin-offs) will need to have non-union labor with reasonable salary and benefits packages, different and more forward-thinking management who can adjust and adapt to current and future trends in the auto business, and most of all: Building good-quality, reasonably-priced cars and trucks that Americans actually want to buy.

Out of our country's economic and financial problems, I hope this will be the catalyst of a new era of more competitive American business.

The Wall Street Model Is Doomed...

2008-11-17T15:48:00.000-08:00

I've always thought that the brokerage model, where your "trusty" stock-broker manages your account, and keeps you updated on the latest news and hottest buys, wasn't the best one around. I got to know a friend of a friend of mine, who was a stock broker with UBS Paine Webber back in 2003.

While he was personable and a good salesman, it was pretty obvious to me he wasn't a knowledgeable investor. The nice suit and fancy offices are just a sales gimmick to give the appearance of confidence to unsuspecting "investors." I use that term in quotes because most folks who invest in stocks, bonds and mutual funds through their 401(k) or IRA plans aren't really investors - just like the guy or gal trying to sell them equity-based securities.

Watch this video from TheStreet.com, and see what the RealMoney contributor says about the investment banking model and Goldman Sachs. I'll give you a hint: The future doesn't bode well for either.

The "buy and hold" method of investing is dead. If you want to profitably invest in the stock market, you need to get educated and realize that it's a trader's market.

And the best guy I can recommend for advice on the stock market is Phil Grande, owner and founder of Phil's Gang. You'll learn more in a couple of weeks from Phil, than you will in a year from CNBC. Check out his radio broadcasts, I think you'll like what you hear.

No-Fail, American Capitalism

2008-08-13T15:03:00.000-07:00

That's what I call the current brand of policies with regards to big investment banks, plus Fannie Mae and Freddie Mac. They can reap all the rewards they want, but the government will protect them from the consequences of their bad decisions.

Bill Fleckenstein has a good article on MSN Money, where he calls this situation "Crybaby Capitalism."

Unfortunately, this new kind of capitalism will lead us into old problems our country has seen before. At best, we'll just see a repeat of the economy of the 1970s. At worst, we'll see the economy look like it did in the 1930s - and I'm not exaggerating or saying this for shock effect.

The reason I say this is because there was just too much borrowing and spending that went on in residential real estate. Good old-fashioned savings and investment are the real drivers of true economic growth. Not the financial steroids of easy credit and the increased supply of money.

Peter Schiff (one of the best American economic/financial analysts) echoes these sentiments in his latest column.

Again, I may sound like a broken record (or a skipping CD), but I still like physical gold and silver as medium to longer-term investments - even though both spot prices took a beating this past week.

Why Listen to Jim Cramer and CNBC?

2008-06-24T22:25:00.000-07:00

Watch this video from Don Harrold, and you'll be asking this question...

Congress Suing OPEC?

2008-05-21T22:11:00.000-07:00

Just when I thought the news couldn't get any crazier (other than oil hitting $133/barrel), this is the headline I read.

Now I'm convinced that 99% of our Congressmen and Senators are economically illiterate, crazy and stupid. I'm pretty sure their ears are burning from angry constituents wanting them to 'do something' about the skyrocketing cost of gasoline and diesel fuel.

But this isn't the long-term solution, just a short-term election year PR opportunity.

The biggest cause of increasing food and energy prices is our national central bank, the Federal Reserve. The Fed has continued to increased the supply of fiat currency, and as a result, we have a larger number of dollars chasing the same number of goods.

It's done its best to keep this bubble/consumption economy afloat, and bail out the investment bankers on Wall Street. But this juicing of the money supply is hurting Americans and everyone else who holds dollar-denominated investments.

I don't think anyone outside of the Bush Administration really believes Hank Paulson when he says our government has a 'strong dollar' policy. Yeah - pull my other leg, Hank, it plays Jingle Bells. The Fed is letting the dollar sink in value, while trying to pump up the economy and Wall Street.

In the meantime, all Americans are seeing their wealth decline because the value of our money is declining. Unless they hold their wealth in appreciating foreign currencies, stocks of high-quality foreign companies, or commodities such as gold and silver.

Yes, I probably sound like a broken record, but it's the best investing advice I can recommend for current market and economic conditions. Please read Chapters 8 through 10 of Peter Schiff's book Crashproof, and move your money accordingly.

Obama, Hillary and the Stock Market

2008-05-18T21:56:00.000-07:00

Conventional wisdom seems to say (if you watch CNBC and Larry Kudlow) that Wall Street prefers Miss Hillary to Obama as the Democratic nominee. That's scary to think that financial professionals prefer an avowed socialist/Marxist to another lesser-known socialist.

Especially when he has Paul Volcker as an economic advisor; and has everyone forgot the socialized health-care fiasco (also known as Hillarycare) she tried to foist on our economy back in 1993?

I guess people prefer the devil they know to the one they don't.

On the Republican side, John McCain is no picnic either. He's the co-architect of McCain-Feingold Incumbent Protection - er, I mean, Campaign Reform Act. In my opinion, this automatically disqualifies him for higher office.

Talked with a friend of mine in Illinois who's not a political junkie, and even he can see that there's no real difference or choice between Obama, Hillary and McCain.

Like John Loeffler says, it's Socialist Party (R) vs. Socialist Party (D).

It's amazing that the President and Congressmen from both parties in Congress (with the exception of Ron Paul) don't seem to have a clue about what's going on with the skyrocketing prices of food and energy. The lack of understanding, vision and leadership with regards to energy, the sub-prime mortgage fiasco and resulting credit crunch is amazing.

On one hand, left-leaning folks in Congress admit that we need more domestically produced oil and gas to reduce our dependence on imported Middle Eastern oil; but we can't drill in the Alaska National Wildlife Refuge (ANWR), because that would be too harmful to the environment and leave a bigger 'carbon footprint' on the earth.

What a bunch of BS - the only "footprint" should be on the backside of these idiots, kicking them out of Congress for such utter stupidity.

The Republicans don't get off easy, either. A lot of them believe we should "stay the course," "finish the job," and "win the war in Iraq." Never mind that after five years, Americans still haven't been told exactly what the job, mission or goal(s) are in Iraq.

And the US military is the largest American consumer of oil and gas. Why the hell are we still over there in this Forever War, when all Americans are getting squeezed every time they fill up their gas tanks and buy groceries?

I know that Republicans in Congress tell us over and over that because those darn Democrats are in control of Congress, that's why foreclosures, oil and gas prices have gone up and we aren't as well off economically. Well.... not exactly.

The Federal Reserve is the biggest culprit behind higher prices. This excess printing of money to pump up the economy, the stock market and bail out investment bankers is the biggest cause of higher prices. It's more money chasing the same number of goods.

Now didn't you so-called 'conservative Republicans' have six years control over Congress, and you basically fiddled while these problems were burning? Didn't you let these mortgage monkeys commit fraud, by lending to anyone could fog up a mirror... and sell these bogus loans to Fannie Mae, Freddie Mac, and Wall Street firms?

I could go on much longer, but I'll cut this rant short. The bottom line is that there's no real choice for President between McCain, Hillary and Obama. The lesser of two evils is still evil. No good is still no good.

I don't know what the solution to this political problem is. Probably a downturn in the economy that's sharp and painful enough to re-inject common sense into enough Americans. Wish I could see a better answer, but that's how I see it.

Deflation... Sort Of - Stagflation, Yes

2008-05-16T16:35:00.000-07:00

Bloggers and columnists have different takes on whether the economy is in an in-flationary or de-flationary cycle. In most parts of the country, real estate is in a deflationary cycle.

US stock markets (the Dow, S&P 500 and Nasdaq indices) are going sideways to slightly lower. Incomes of Americans seem to be stagnant.

But the prices of food, energy and just about everything else are going through the roof. In Idaho Springs, Colorado last Saturday, I bought my first gallon of 87 octane gasoline for $4.00/gallon ($3.999 to be exact). Wasn't happy or proud of that to say the least. Especially after losing $100 at poker in a Blackhawk casino earlier that day.

I know the government says that inflation is still low or "manageable" (depending on which parallel universe you live in where you don't eat or drive your car), but Gary Dorsch confirms the fact that inflation levels are vastly understated by Uncle Sam.

This adds up to the economic condition known as stag-inflation (or stagflation), which was last seen in the US in the late 1970s. Fortunately, we had a Fed Chairman with the cajones to put the kibosh on inflation through higher interest rates.

Unfortunately, today we have "Helicopter Commander" Ben Bernanke instead of Paul Volcker as Chairman of the Fed. And Ben Bernanke is darn sure no inflation hawk. For all the talk from Hank Paulson about a supposed "strong dollar policy" (yeah, right), what the Fed is doing is a totally different story. More of the same stuff that got us into this mess - low interest rates and an increased money supply - is being done to hold off the inevitable recession (at least in the short term).

What should you do to prepare for the upcoming economic mess? Invest in tangible (non real-estate) assets, such as physical gold and silver. For more complete recommendations, read Chapters 8-10 of Peter Schiff's book, Crashproof. It's well-thought out, and clearly explains where and why you should invest in certain asset classes to protect yourself against stagflation.

More Stupid Government Tricks

2008-04-09T22:10:00.000-07:00

Mike Shedlock hits it on the head - again. The latest call from FDIC chair Sheila Bair to prevent more foreclosures from occuring is just more of the same government intervention that got us into this mess.

If the Fed and Alan Greenspan hadn't lowered interest rates to rock-bottom lows, juiced the money supply, and encouraged everyone with a job and a pulse to get a mortgage and buy a house, we wouldn't have this gross misallocation of resources, and this mess in the first place.

Ron Paul took Bernanke to school (again) about the dangers of government intervention in the financial markets, and loss of civil liberties during the Fed Chair's latest testimony to Congress. This unholy association of business and government isn't just the wrong prescription for America's economic woes, but is an increase of the Fed's power - which is virtually unchecked by our Constitution.

The Declaration of Independence says Americans have the right to 'life, liberty and the pursuit of happiness,' not a guarantee for 'price stability and maximum employment,' which is what the Federal Reserve is supposed to do. But that's not the role of government as defined by our Founders. Government can't (and shouldn't) try to promote an 'Ownership Society' or any other guarantee of financial or other security. Whatever the government can give, the government can also take away - too many Americans have forgotten this important point.

When you listen to what Congressman Paul says about our economy, monetary policy and the role of government today, he makes more sense than any other politician in Washington today. It's an absolute travesty that the so-called 'conservative' Republican party tried to ignore, mock and railroad his candidacy for President. The GOP is like a headless chicken running around in circles, and the Democratic party isn't much better.

As John Loeffler from Steel on Steel says, it's Socialist Party (D) and Socialist Party (R), with very little difference between them. Ronald Reagan said it best: "Government is the problem, not the solution." Americans need to remember that the government that caused our financial and economic mess isn't the best entity to try and solve it.

Only time, the free market, and getting government out of the mix are the best solutions for our economic and financial woes.

Fed Halted a Financial Chernobyl?

2008-03-23T20:47:00.000-07:00

That's what London's Daily Telegraph reported about the Fed and JPMorgan's recent bailout of Bear Stearns. Funny that we don't see this type of reporting in the American financial media.

"If the Fed had not stepped in, we would have had pandemonium," said James Melcher, president of the New York hedge fund Balestra Capital. There was the risk of a total meltdown at the beginning of last week. I don't think most people have any idea how bad this chain could have been, and I am still not sure the Fed can maintain the solvency of the US banking system."

"We've been worried for a long time there would be nobody to pay on the other side of our contracts, so we took profits early and got out of everything. The Greenspan policies that led to this have been the most irresponsible episode the world has ever seen."

That says it all for me. I don't claim to fully understand credit swaps and this 'daisy chain' of derivatives. But I know that bad things happen when you borrow, spend and speculate too much. It's bad for a household, company, and especially a country.

At all three levels, Americans are carrying a crushing debt load. It's just a matter of time before this house of credit cards, auto loans and ARMs comes tumbling down. If you're a savvy investor, and go into precious metals, put options on most American stocks (and call options on gold, silver and crude oil), and purchase physical gold and silver... you'll be fine.

If you listen to CNBC or your stock broker, and stay in stocks for the 'long-term,' you'll be in a world of hurt. Reduce your debt load, get financially literate, and learn to sell and market. I know I've said it before, but I can't overemphasize the importance of this advice. Job security today is a myth. I just talked with the father of a 40-something guy from my hometown who works for a big telcom company.

Been there for 17 years, but the company's in bad financial shape. He's worried about his job being next on the chopping block. Another friend of a friend works for an office supply company, who's in negotiations with another company about a buyout/merger. And he's concerned about his future with the company.

I hear these stories over and over again - and with intelligent, competent, hard-working folks. The 'safe, secure American job' with good benefits is pretty rare nowadays. Almost as big of a myth as Bigfoot or the Loch Ness Monster. That's why I preach over and over on the importance of reading (and understanding) what financial statements mean; and learning to sell and market effectively.

If you can sell in person or in print, you're VERY valuable to a potential employer. You also have an important skill to use if you want to start your own business. I hope everyone had a great Easter, keep your eye on the financial stocks. If you invest in these companies at all, I'd recommend longer-term put options as the only way to play them.

Client No. 9, Obama's Pastor, but no mention of Bear Stearns. Hmmm....

2008-03-15T20:00:00.001-07:00

The news media had a field day Thursday and Friday talking about Eliot Spitzer's infidelities, and the preaching from Barack Obama's church. I think I heard the pastor's post-9/11 rantings at least 4 or 5 times.

But what I didn't hear that much about was more interesting: The financial problems with Bear Stearns, and the 45% haircut in the stock price. I realize the media and the American public can't get enough of a good, tawdry sex scandal. However, it was curious that we had to hear the fire-and-brimstone preachings of Pastor Jeremiah Wright over, and over... and over on all the talk radio stations in Denver.

This was probably done for two reasons:

1) The Establishment wants Hillary to win the Democratic nomination, so she can run roughshod over John McCain in November (If you believe he's got a shot of winning, I've got oceanfront property for sale in Iowa). They're a little disturbed that Obama is doing so well, and has a better-than-average chance of getting the nomination. This much ado about Obama's pastor is just a political football that's probably been saved up for just the right time. Is it an insight into his beliefs? Yes, but I'm not buying that it's the most important thing in this campaign since sliced bread.

I think most Americans (including yours truly) are tired of the "inside politics" back-and-forth, especially when we have a recession and a credit crisis still looming large over the American landscape. Not to mention increasing gas prices, and no real solutions being offered by either party in Washington. The second reason?

2) The government and Wall Street didn't want the Bear Stearns problems to be the center of attention, and cause further panic in the stock and other financial markets. I think Mish is right, and Bear Stearns is staring bankruptcy squre in the eye, and may cause a chain reaction of problems for other investment banks and brokers.

This just in: JP Morgan to Buy Bear for $2/Share.

I doubt it'll be enough to prevent an eventual collapse in Bear Stearn's stock price, but it's a stop-gap measure for now. When any stock loses almost half its value in a trading day, on over 15 times normal volume, that signals a larger decline ahead - barring divine or government intervention, that is.

Jim Rogers is right - go short on all financial firms, and long on commodities.

Ethanol: The Big Energy Hoax

2008-03-12T17:29:00.001-07:00

Walter Williams has a great article at Townhall.com on the energy fraud that's being sold as the solution to imported Middle-Eastern oil.

Ethanol sounds good at first - a renewable source of energy that we grow plenty of here in the US. However, what you don't hear in the media is that it's heavily subsidized by Congress - about $1.05 to $1.38/gallon. The increased demand for corn to transform into ethanol is one reason why food prices have gone up (not to mention the Fed's juicing of the money supply).

Here's some key information from Williams' column:

"Ethanol contains water that distillation cannot remove. As such, it can cause major damage to automobile engines not specifically designed to burn ethanol. The water content of ethanol also risks pipeline corrosion and thus must be shipped by truck, rail car or barge. These shipping methods are far more expensive than pipelines.

"Ethanol is 20 to 30 percent less efficient than gasoline, making it more expensive per highway mile. It takes 450 pounds of corn to produce the ethanol to fill one SUV tank. That's enough corn to feed one person for a year. Plus, it takes more than one gallon of fossil fuel -- oil and natural gas -- to produce one gallon of ethanol. After all, corn must be grown, fertilized, harvested and trucked to ethanol producers -- all of which are fuel-using activities. And, it takes 1,700 gallons of water to produce one gallon of ethanol. On top of all this, if our total annual corn output were put to ethanol production, it would reduce gasoline consumption by 10 or 12 percent."

If this is the case, then why has ethanol been touted as America's energy solution? With anything that happens in Washington DC, always follow the money. The answer? Big Agra companies such as Archer Daniels Midland (ADM), who's the largest producer of ethanol in the US. Coincidentally, they're a big campaign contributor.

I grew up on a wheat farm in Kansas, and it's nice to see corn farmers get more money for their crop. But the way it's being done won't help our dependence on foreign oil, and could set America up for food shortages in the next several years.

This seemed almost impossible over the past few decades, but because of a Biblical-type drought in the Great Plains states and increased foreign demand, this could be a likely scenario. Congress should quit subsidizing ethanol, and let free-market alternatives fill in this energy gap. But in an election year, where corporations and households want guns and butter, I doubt it'll happen.

And it won't until we hit a crisis stage stage, where this action becomes politically and economically feasible.

Financials in a Funk

2008-03-11T18:31:00.000-07:00

If you've followed the markets even in passing the last few months, this is already given data. Even with the Fed's $200 Billion "Booster Shot" today, Bear Stearns, Citigroup, Lehman Brothers and Merrill Lynch have all taken battleship-sized hits to their respective stock price over the past year.

That's because they listened to the Wall Street Whiz Kids, and invested in exotic (and stupid) bundled sub-prime and Alt-A mortgages. The only problem was enough of the toxic loans were mixed in with the good ones; and not even the sharpest accountant could tell what the true value of these bundled investments were (or are today).

Consequently, the financial firms have lost a lot of money on these toxic investments, and had to borrow from Sovereign Wealth Funds to shore up their cash positions. To folks on CNBC and Fox Business, it may not be a big deal. But to a former accountant like me, it's a VERY big deal.

When your company has to borrow billions of dollars from foreign investors, that's not a good thing. Firms have gotten away with it over the past few decades because the US Dollar was the world's reserve currency, credit was easy, and life was good. But today the USD has declined over 40% in world currency markets the past 7 years; lending standards across the board have tightened up considerably; and we're in danger of having these SWFs taking over some of our country's biggest banks and brokerage houses.

This isn't a good situation for our country. While government officials seem to be more concerned about Islamofascists halfway across the world, we're in an economic struggle here at home that's not going well. The Fed and Bush Administration look like the Keystone Cops grasping at straws to try to 'make things better.'

And like I've said before, what the government should do is what they won't do. And what they should do is to raise interest rates to defend the dollar on world markets; and forget implementing these stupid stumulus packages, which will have little to no effect on the economy... except maybe prolonging the financial agony even further.

I'll give 'em credit in this regard - the prolonged 'echo boom' in real estate and credit lasted longer than I thought it would. I was concerned during the 2004 and 2006 elections that we'd see a downturn then. But we can't avoid it in 2008. The government's stats say that technically we're not in a recession, and inflation is "contained," but John Williams of ShadowStats.com says different.

The Fed stopped reporting M3 money supply back in March 2006. That's important because M3 is the broadest (and most accurate measure) of monetary inflation. The Federal Reserve doesn't fight or 'maintain' inflation, it creates it through increasing the money supply. You have more dollars available to buy the same amount of goods; that's why you're seeing higher prices for food, energy and just about everything.

Not to mention tightening supplies of wheat and corn from America's ethanol insanity. All these factors come together for a toxic economic mix that won't bode well for the US in the next several years. These formerly 'blue-chip' financial firms look pretty tarnished right now. The only way I'd invest in them is to buy put options, sell them short (but only if you're an experienced trader and know what you're doing), or just sell the stock.

These financial companies (and our country's) financial statements look pretty bad. The only fix for them will be time, a commodity-based currency, and increased savings and investment. No more credit binges, excess borrowing or spending. It's tough medicine, but will have to be taken by Americans - and our government - sooner or later.

The John Galt Solution

2008-03-10T20:51:00.000-07:00

Finally, a voice of common sense and reason when it comes to a good solution for our economic dilemmas. John Mauldin's Outside the Box column refers to Caroline Baum's article in Bloomberg about the best course of action our national policymakers should take.

Here's the crux of the article:

Galt, the hero of Ayn Rand's magnum opus "Atlas Shrugged," stops the world by going on strike. He and the "men of the mind" literally withdraw from the world after watching their wealth confiscated by the looters (the government).

Toward the end of Rand's 1,000-plus page novel (or polemic), the economy is in shambles. Desperate, the looters kidnap Galt and prod him to "tell us what to do."

Galt refuses, or rather tells them "to get out of the way."

And that's exactly what Bernanke, Paulson, and Bush should - and all they really can do: Get the heck out of the way, and let the financial hangover begin. There's no "easy button" to get rid of the excess borrowing, spending and stupidity over the last several years.

What needs to be done is to put the economic crack pipe down, and get back to more saving and producing - not borrowing and spending like drunken sailors on shore leave. In the meantime, get out of the stock market unless you really know what the heck you're doing. Invest in gold, silver, and other commodities; along with strong foreign currencies like the Swiss Franc.

Some people may think you're crazy to invest this way in the short-term, but they'll believe you in the long run - and you'll be better off financially. Remember, the herd is almost always running the wrong way. Do the opposite of what they do, and you'll be just fine.

Commercial Real Estate a Mature Industry?

2008-02-18T19:19:00.000-08:00

I read a good post from Mike "Mish" Shedlock this weekend about the commercial real estate market. It reinforced my hunches about the status of this industry and business model.

Mish said it beautifully: "Does the Shopping Center Economic Model Work?" His answer (and mine) are a resounding NO. There are a number of factors that work against retail stores and big shopping centers. Let me count the ways:

1) Rising Energy Prices. This is a double-whammy to retail store/mall owners. First, the rising cost of energy increases the store's utility costs and overhead, which has to be passed along to customers. Second, it costs more for families and individuals to drive the car or SUV to the shopping center. Unless that mall or store is close to where someone lives, its doubtful many folks will want to drive a long ways to shop.

2) Time. It seems life is busier today than it was even five or ten years ago. People don't seem to have the free time they used to. Even if they can afford to drive halfway across town to shop at their favorite mall or store, they may not have the time or energy. And when you're in the store, it may be understaffed, which can result in long lines and wait times to get checked out. Not to mention talking with retail store staff who generally know less than you do about the products. This makes the option of shopping online more appealing, which brings me to my third reason:

3) The Internet. Shopping sites such as Amazon, eBay, Overstock and many others give consumers options that weren't available 10 or 20 years ago. And why it new from a store, when you can buy it used at a discount... from the comfort of your office or home? Point, click, done.

4) The Hassle. I'm a 30-something single guy, and I hate going to shopping malls and stores - especially during Thanksgiving or Christmas. There's too many people, it takes too much time, and I'd much rather buy online or from a less crowded store. Now, I know some people (usually women) who love to engage in what they call 'retail therapy.' Bully for them. But it's just not my cup of tea.

It's not all negative for retail stores. I think most Americans still prefer to look at, feel and try on clothes before they buy. But as a viable business model, I think the mega-malls and shopping centers have matured, and may eventually go the way of the dinosaur. It may take a decade or two, but I believe more transactions in the US and around the world will be done online.

It just makes sense. Why spend tens or hundreds of thousands of dollars to start and maintain a brick-and-mortar facility, when you can spend a fraction of that amount on a virtual, online storefront? If you have a phone, fax, e-mail and merchant accounts, and a website that can take payments online, you're in business.

You can start an online business from a small studio apartment or home, instead of a physical store - where you have the potential threats of fire, theft, and vandalism. Instead of selling a physical product or service, you can sell information - which has low costs, and high profit margins.

These are the reasons why I believe commercial real estate (specifically shopping malls and retail stores) are at a plateau, if not on the down part of the Bell curve. Just like with stocks or commodities, the trend is your friend. And these trends are a lot friendlier to Information Age-type businesses, vs. stores from the Industrial Age.

Paulson Didn't Listen...

2008-02-13T13:11:00.000-08:00

Just as I ended yesterday's blog post asking Ben, Hank and the boys to get heck out of the way, they just couldn't leave well enough alone. I should have known better... it is an election year, and they have to throw some bread to lower and middle-class Americans, while the circuses of reality TV and pop culture entertain them.

My suspicion is that it'll help financial firms like Merrill Lynch and Bear Stearns with the valuation of these bundled and sold mortgage 'investments' (and I use that term very loosely), and improve how they look on their books - maybe for another quarter or so. But it's only a short-term Band-Aid that may prop up the public's confidence in the mortgage market.

And confidence is the only real 'collateral' that investors have with financial paper assets. History shows that once the public loses confidence in a paper asset, it takes a long time to get that confidence back. One example is the Dow Jones Index, which basically broke even in nominal terms from 1929 to 1954, and actually lost ground against inflation.

Other paper assets, such as Enron stock, will have a loss of confidence and never get it back again. That's why I'm very bullish on precious metals and commodities over the next few years to a decade. Gold is a good buy, but silver is still a GREAT buy - even at $17/ounce. Gold and silver-mining shares (and the physical metals) are the best places for your money. Metals markets can be very volatile, but don't let that scare you.

All markets - whether they're stocks, bonds, or commodities - will be pretty volatile in the next few years. Tangible assets will NEVER go down to zero, like a share of a dot.com stock can. And the Fed will keep increasing the money supply, with a larger number of dollars chasing the same number of commodities. That's the biggest reason I'm bullish about investing in these markets, and you should be too.

Is the Credit Crunch Growing?

2008-02-12T16:18:00.000-08:00

We've all known for several months about the sub-prime/ARM mortgage debacle, and how it's forced lenders to tighten their standards. Better late than never, I guess.

Now we're seeing a reduction in lending with credit cards. Exhibit A is the British Internet bank, Egg, withdrawing credit to 161,000 customers it believes pose an 'unacceptably high risk.' Peter Schiff, head of EuroPacific Capital, also sees credit-card lenders in the US ratcheting up their standards after seeing their profits go down, and their stocks downgraded.

As I've said before on this blog, excess credit and speculation have been the two main drivers of the dot.com and real estate manias - and ultimately, the US Economy. Once the credit begins to contract, the overall economy will follow suit. If you understand the fundamentals of Austrian Economics, it's pretty easy to predict. If you don't know these fundamentals, get up to speed on them as soon as you can.

Go to: 321Gold.com, Financial Sense Online, Prudent Bear, Daily Reckoning.com, and Kitco for starters. If you just want entertainment, eye candy, and escapism from the real business and economic world, go to Fox Business News or CNBC. Liz Clayman and Erin Burnett are definite hotties.

Where was I at? Oh yeah, credit and the economy. It was inevitable that we'd come into a recession because of low interest rates, easy credit, and the increase in money supply. The yin and yang of business cycles, if you will - whatever goes up must come down. It should be common sense... you can't just borrow and spend your way into prosperity.

If we're not in recession already, it's not very far away. The skyrocketing foreclosure rates around the country, and the emptier bars and restaurants I see in the Denver-metro area indicate the economy is slowing down. Last week's ISM non-manufacturing index number confirmed this suspicion as well.

It doesn't matter what kind of stimulus package Congress or the President passes, or how low the Fed pushes interest rates. The only cure for this credit-induced party, is an extended recession that will probably last several years. My hope is that Americans eventually realize that government intervention in the economy (and any other part of society) isn't the answer to our problems, but the cause of them.

Get Paulson, Bernanke, Bush, and the whole crew out of the way, and let the financial hangover begin.

Like Two Drunks Walking Down an Alley

2008-01-15T12:07:00.000-08:00

That's how I see Bank of America and Countrywide after their recent merger. Especially after reading Robert Shiller's opinion of how the falling US housing market will affect the mortgage values for both lenders.

It just didn't make any sense to me, why one struggling mortgage firm would buyout another. The only reasons would be:

A) Both lenders needed a larger volume of loans to lower the percentage of bad loans
B) That's how big publicly-traded companies solve their problems: Either through selling assets or merging, or
C) The management of these companies are good corporate politicians (that's how they rose to the ranks of management), but really dumb businesspeople.

The mega-mergers of the past several years have been bad for American business. It's lessened competition between firms, reduced the number of jobs, and given a temporary bailout for bad management and business decisions.

B of A and Countrywide are like a couple of drunks walking on a downtown city sidewalk after midnight, struggling to stay standing and make their way home. Maybe they make it home safely, or maybe they get busted for DUI - or worse.

As their balance sheet stands now, there could be enough good loans to make up for the bad ones. But going forward, Shiller says that may not be the case:

"When people see that their houses are worth a lot less than their mortgage balance, they have an incentive to default. The troubled mortgages that Countrywide already has will be followed by even more troubled ones.''

And that's what concerns me. When the average financially-illiterate American homeowner realizes that he or she won't see any equity gains for years to come, it could trigger even more foreclosures than we've seen from the sub-prime/option-ARM fiasco. These could be homeowners who are current on their mortgage, but as Shiller says, have an incentive to default.

When you combine this with a declining dollar that's losing purchasing power, plus tightened lending standards which will probably require a 5-10% cash down payment, I don't see how the real estate market will rebound anytime soon.

The recent spikes in gold and silver have made me wonder if the rest of the world knows something most Americans don't: Our country is heavily indebted, essentially bankrupt, and the only way it can get out from under this mountain of debt is to inflate the currency and try to pay it back with cheaper US dollars.

I hope I'm wrong, but economic fundamentals and laws and pretty stubborn things. I pray that our leaders come to their senses, start to cut federal spending and return to a more sane monetary policy. Time will tell.

Ben Bernanke is the Fall Guy

2007-12-11T14:10:00.000-08:00

Growing up in the 1970s, I watched a TV show that starred Lee Majors - and Heather Thomas - called the Fall Guy. It was about a Hollywood stuntman who moonlighted as a bounty hunter. Stuntmen are called 'fall guys' because they take the punishment so the star of the show doesn't have to.

Why am I talking about a 70s TV show on a financial blog? I think about the current situation with Ben Bernanke at the helm of the Federal Reserve. Financial commentators on TV, radio and the Internet are criticizing Bernanke for not 'doing enough' to make the sub-prime mortgage/real estate bubble go away. The problem is that Bernanke isn't the one who caused this problem, but he's supposed to fix it.

The "Maestro" himself (aka Bubbles and Mr. Magoo), Alan Greenspan, was the one who caused this money creation and easy credit bubble - first in stocks, then in real estate - during his term as Federal Reserve chair. Ben Bernanke is now the 2000s version of the Fall Guy to blame for when these problems hit the proverbial fan.

I don't think "Helicopter Ben" is the best guy for the job because he's an Ivy League academic (who usually have the least amount of common or financial sense), and because he's hell-bent on avoiding another deep recession or repeat of the Great Depression. His solution is to crank up the printing presses, and flood the system with fiat currency. The only problem is that this will cause a hyper-inflationary (then deflationary) recession/depression, because the purchasing power of the currency will have been deeply eroded.

While it may prop the financial markets up in the short term, there's nothing the Fed can do to avoid a recession in the long-term. As Paul Farrell of CBS Marketwatch says, "Recessions are natural, positive, healthy... and inevitable." Because politicians have a low tolerance for seeing a recession on their watch (to preserve their incumbancy and legacy), the Fed has done the bidding of incumbents to ward off a recession at all possible costs.

The recent Bush/Paulson mortgage bailout is a prime example. This will only delay the inevitable correction in over-valued real estate prices, and the needed correction in the economy. I've noticed a lot of stupidity in the real estate and financial planning business, maybe a good recession is what's needed to re-inject a much-needed dose of common sense back into our markets and society.

The Mother of All Bad Ideas

2007-12-07T16:27:00.001-08:00

Peter Schiff hits it on the head with his latest column. President Bush and Secretary Paulson are putting the best possible spin on this proposal, and how it will alleviate problems in the sub-prime and overall housing market. But the only thing that will "solve" this problem is time, sanity and better lending practices.

Whenever government gets involved to 'help' free markets, bad things happen. As Schiff eloquently says, this is a stay of execution for the real estate market instead of a pardon. A majority of Americans are over-leveraged with bad debt (credit cards, auto loans and home mortgages on their residences) that doesn't put any cashflow into their pocket.

While a growing number people are focused on rapidly-declining (or negative) equity in their homes, they're ignoring the most important part of personal or business finance - cash flow. The flow of cash is to a business or household what blood is to the human body. These high levels of debt Americans have incurred to finance their rock-and-roll lifestyle, are clogging their financial arteries (and reducing the net positive flow of cash) like a baked potato loaded with sour cream and butter constricting human blood vessels.

The only way to solve cardiovascular and financial problems is to make healthier financial choices - cut back on bad debt... learn to sell and market... start your own (or a more profitable business). I'd recommend reading authors such as Peter Schiff, Robert Kiyosaki, and Dave Ramsey. All three are healthy oases of common sense in an increasingly insane world.

Real Estate & Mortgage Chickens Finally Come Home to Roost

2007-08-15T10:05:00.000-07:00

I guess it's better to be 3 years early instead of a day late - which is exactly what I was in calling the real estate/mortgage market bust. My predictions are finally coming to fruition, and we're seeing the start of the Great American Debt Implosion.

Back in 1993 after I graduated college, I was a Kansas farm kid living in suburban Kansas City (Kansas side), in awe of the fancy cars and nice homes a lot of people had. I made the assumption that these folks were rich, but later found out that most folks with lots of 'bling' have it financed.

The past few years I've looked in bewilderment and amusement at how people in Colorado have afforded these McMansions, nice cars and SUVs. The answer - obviously - was/is easy credit. When Greenspan lowered the rates to rock-bottom levels, that was all Americans needed to go on a shopping spree. Instead of 're-trenching' and saving money back in 2001 (which is what usually happens in slow economic times), people just papered over the problems by borrowing more.

In the early to mid-2000s, real estate prices kept on going up and up, and there was this newfound equity folks could extract bundles of cash from - just like having their own magical ATM. But that ATM has gone up in smoke, just like a lot of sub-prime (and now Alt-A) mortgage lenders have.

Even if homeowners didn't use their house for a cash machine, folks in the past few years have definitely bought at the top - and shouldn't expect much (if any) appreciation in the short-to-medium term future. I know two couples who bought homes at a cool quarter million and half million each. They're nice homes, don't get me wrong, but I think they'll come to regret those decisions in the near future.

It's crazy how supposedly-educated Americans are so financially and economically illiterate. They buy into the myth that their home is an asset, real estate is (or was) a 'sure thing' investment, and that levels of government, corporate and personal debt don't matter.

Well, the time that debt matters is right here and right now. The Dow has gotten a 1,000 haircut in just a few weeks, The Fed and other central banks around the world have injected massive amounts of liquidity into the financial system, and Jim Cramer had an on-air meltdown, imploring Ben Bernanke to do something for Wall Street firms to save them from their own stupidity.

Speaking of stupidity, here's a flashback to November of 2006 where the Mad Moneymeister gave the 'all clear' to buy back into homebuilder stocks. The same ones that have lost 15-20% now in August of 2007. It's funny, isn't it, how CNBC and other financial shows almost never tell the investing public to sell - except when the stock has tanked so badly, the only benefit you get is a tax deduction? Like the 80s song, Things that make you go 'hmmmmmm...

For even more stupidity, here's an article trying to spin recent home sale news in a positive light. They're saying "Even though the number of sales have gone down, the average price of homes has gone up. That's why we're bullish on real estate." Note to idiots: The reason the average price has gone up is because the number of homes sold has gone down. The higher priced homes will skew that average up - it's a simple freaking concept! That's basic math 101, but maybe your classes were different in the public school you went to.

If the real estate correction were a baseball game, I'd say we're only in the 2nd or 3rd inning. We've got a long ways to go, especially with the Fed increasing money supply at crazy rates, plus oil and gas prices staying high. I don't know when the bottom will be, but I think it'll be at least a few years - maybe a decade or so - before real estate will come back.

This has been the mother of all debt parties, and the hangover will be a doozy. Prudent folks will keep their debt levels and expenses as low as possible, and keep at least a portion of their portfolio in precious metals. Normally cash is king in declining stock and real estate markets, but not when monetary inflation is around 10%/year. Even if you get 5-6% interest on your money, you're still losing 4-5% in real (inflation-adjusted) terms.

I'd highly recommend you get financially and economically literate if you haven't yet - or find someone who is and heed their counsel. Start by reading the book Rich Dad, Poor Dad by Robert Kiyosaki, and Why We Want You to Be Rich by Kioysaki and Donald Trump. You may not like The Donald, but he has a very good understanding of what's going on in America and around the world - and how prudent Americans should prepare for a very different future.

A friend of mine I had lunch with was worried about what's happening in the markets and the economy. But if you're financially and economically literate, you should be ecstatic. That's because some great opportunities will reveal themselves to wise investors. You can take advantage of these opportunities honestly and ethically, and make a boatload of money in the process.

Now Comes the Hangover

2007-07-06T13:58:00.000-07:00

The story about the challenges with the Bear Stearns hedge funds that were tied to sub-prime mortgages is probably the tip of the financial iceberg. The American economy may be the 21st Century Titanic that has already made contact with the mega-sized chunk of ice, but only shows minor damage. As Al Lewis writes, Wall Street deserves a fair share of the blame for sowing the seeds of the sub-prime mortgage meltdown.

However, the Fed, Fannie Mae and Freddie Mac are also partially at fault. After 9/11, the Fed lowered interest rates to rock bottom levels and encouraged Americans to borrow and buy as much as possible - especially real estate. Freddie and Fannie are GSEs (Government-Sponsored Agencies) that purchase and/or securitize mortgages made by others. Even if a Washington Mutual or Wells Fargo made a shaky loan, after they offloaded it to a GSE, it wasn't their problem anymore.

Here's yet another case of where government intervention in the free market has caused and will cause more financial calamity in the US. If the mortgage lenders were forced to bear the risk of making these questionable loans, the problem would have been minimized, and the financial hangover would have been shorter and less painful. Unfortunately, that's not the case.

The US economy in the early 2000s was heading downward because of the dot-com bust, and other factors. But instead of letting the economy run its course, correct, and have consumers 'retrench' (i.e., cut back on spending), the government had to step in and 'do something.' By lowering rates to all-time low levels and encouraging borrowing out the wazoo, they created the residential real estate bubble and delayed the inevitable economic downturn.

The American economy is similar to a drinking buddy you probably had in your college or 20-something days. It's 2 AM, your friend is three sheets to the wind, and really shouldn't be drinking alcohol anymore. But instead of giving him water or Coke to drink (and starting the recovery process sooner), you give him four more shots of Jagermeister. He's feeling even less pain, but doing more damage to himself, and delaying the onset of the hangover and recovery.

America's debt party has been a rip-roaring one for sure. I hope that all the borrowing, spending and fun were worth it. In the next few years, I'll think we'll see a drastically different attitude towards borrowing. It may take longer than I think, but eventually debt will be considered dumb, and cash will be king. After the financial dust settles, people will look back on this time in American financial history and wonder what the heck people were thinking.

Poker American Style - 'All In' on Credit, Bluffing with Bling

2007-04-30T09:21:00.000-07:00

This sums up my opinion on America's current financial and economic condition. With a few exceptions, most American companies and individuals have highly leveraged themselves because of 'affluenza' (aka 'keeping up with the Joneses') or to help pay bills. Rising auto and health insurance premiums, skyrocketing college tuitions - not to mention food and energy - are why the American middle class is being squeezed.

To be a good investor, you need to know where a company or country is economically, and where they're headed. Former 'blue chip' companies like GM and Ford are teetering on the edge of bankruptcy (along with Uncle Sam), and living off their past positive performances. All three entities are drowning in red ink, and most Americans are blissfully unaware how leveraged they are. Nobody under 40 or 45 should expect Social Security or Medicare to be much help when they get to retirement age.

As Clive Maund points out, our country and most Americans are holding a bad financial hand, with many more liabilities than assets. Instead of a pair of Aces (A-A, the best starting hand in Texas Hold 'Em poker), we're holding something considerably less... say, 9-4 non-suited. Many Americans have a lot of big houses, nice cars and other 'bling' which looks good on the outside, but hides a rotten financial statement on the inside.

China and other Asian countries hold a much better hand because they are a net lender (instead of a net borrower like the US), have a stronger manufacturing base, and a more stable and appreciating currencies. Unless my economic and financial history is wrong, I can't recall any company or country solely borrowing and spending their way to prosperity.

Americans have bluffed their neighbors and other countries about how prosperous we are for a long time. But not any more. Russia, China, Sweden, and other countries are getting out of US Dollar reserves. The ultimate security for any financial paper asset (stock, bond, mutual fund or currency) is the public's confidence in that asset. Once that confidence is breached, it can take a long time for that confidence to be re-gained. Sometimes it never comes back.

The debt party is about to end, and the financial hangover is ready to begin. There's not an easy way out of this mess. Americans can start by reducing their bad debt, increasing financial and economic literacy, and reducing their dependence on government. Post-Katrina New Orleans is a prime example of why folks shouldn't rely on government to solve their problems.

Public and private schools should teach financial literacy, but I don't see it happening anytime soon - maybe not for another generation. It's up to you to get literate and teach your kids and grandkids how to be good business owners and investors. Learn to sell in person and in print, through the art of copywriting. AWAI has great educational programs if you want to learn a profitable, marketable skill along with your current job or business.

I may have painted a gloomy picture, but I do see a silver lining. Tougher times will make Americans more resilient, humble, and restore more common sense to our society. Instead of relying on status and stuff for our happiness, we'll rely more on God and others. Maybe we'll even have time to talk more (and actually get to know) our friends and neighbors. Time will tell, but that's my hope.

Real Estate Fundamentals - the Key to Predicting Value

2007-02-02T13:00:00.000-08:00

Just as I examine fundamentals to analyze commodities and stocks, I use the same fundamentals to look at the present and future of real estate. Residential real estate increased in value from 2001 through 2005-6 because of several factors: 1) Lower interest rates, which allowed folks to buy more expensive homes, 2) "hot" money that flowed in from stock market investors who were licking their wounds, and 3) Excessive speculation - especially in California, Arizona and Florida - that drove prices through the roof.

Interest rates (just like anything else) go up and down in cycles, and eventually 'revert to the mean,' or the average over a long period of time. Because interest rates have been low for the last few years, they're due to come back up. Residential real estate values are affected by location, size of house, and the condition, but the two main factors that affect real estate values (no matter the location) are: Income and interest rates.

Because most Americans rely on working as an employee for a company for their main source of income, and because of global competition for labor, I don't see incomes in the US going up significantly for years to come. This factor - combined with the eventual rise in interest rates - is the reason why I don't see real estate values 'bouncing back' in the short term.

You also see the purchasing power of the US Dollar declining, and this makes for a very strong headwind against American residential real estate. I know that over the past several decades real estate has been (emphasis on past tense) a good asset class to invest in, and that home prices have almost always increased.

However, there are always exceptions to every long-term trend, and I believe the next two or three years will probably be one of those exceptions. I know that realtors and mortgage brokers don't like to hear this type of analysis, and most of them don't believe real estate can decrease in price significantly.

Keep in mind that almost all realtors and mortgage brokers are salespeople - and not investors. They want to believe that the good times will keep on rolling. Residential real estate today looks like the NASDAQ in 2000: A bubble market coming off its peak, and correcting downward. I could be wrong, but looking at the financial and economic fundamentals, I doubt it.

Fundamentals - The Keys to Smart Investing

2007-01-30T11:13:00.000-08:00

I'm not a great short-term technical analyst, but I know my economic and financial fundamentals pretty darn well. Cases in point - Ford and GM. I know Ford's stock ticked up slightly after they released their 2006 losses of $12.7 billion.

But I don't really care. Why? Even if you decide to make a short-term profit by 'bottom-fishing,' investing in financially-troubled companies like Ford just don't make sense. They've losing tons of money, have a mountain of debt and health-care costs, aren't making cars and trucks as good a quality as foreign automakers are, and I really question how competent their management team is.

The same reasons apply to GM, even if their stock price is about 4 times higher than Ford's. Economic fundamentals that I look at show me why commodities - namely gold and silver - are better stores of wealth than the stock market.

It boils down to this: The amount of gold and silver are pretty much finite, or limited - the amount of US Dollars that the Bernanke Fed can print are almost limitless. Monetary inflation is when you have a larger number of dollars chasing the same number of goods, and that's exactly what we're seeing today.

The Fed quit reporting M3 money supply in March 2006, now Barron's has stopped publishing increases in money supply from most Western countries. Common sense tells me that if you have nothing to hide, you shouldn't be afraid to show it. But if someone does have something to hide, then there is something that someone is worried about telling others. Namely that the Fed is inflating like crazy to try and avoid economic and financial pain in the US.

When financial experts like Robert Kiyosaki are saying that the US Dollar is in deep trouble, that carries a lot of weight with me. I'm not as apt to believe the cheerleading that comes from places like Bloomberg and CNBC. They have a vested interest in keeping Americans interested - and more importantly invested - in the stock market.

And when you invest in the US stocks, your investment is held in a currency that's declining in value. You need to look at how well your investments keep up with inflation, and not just provide a nominal return. That's why I'm very bullish on gold, silver and other commodities while the Fed keeps printing money like crazy.

Dow 12,000? Yawn...

2006-10-19T10:27:00.000-07:00

The business and mainstream press are breaking out the party hats with the Dow going over 12,000. It's a nice number and milestone to report on, I just don't think it has that much merit as an accurate measurement of the health of the US economy.

As I said in a previous post, there's a difference between the financial economy and the 'real' economy. The financial economy in the US is based on increasing asset values in stocks, mutual funds and real estate. As folks found out from the dot-com crash, just because a stock has a high price doesn't mean it has high value.

The 'real' economy is based on honest-to-Pete business profits, savings and investment. Unfortunately, most Americans look at the financial and not the real economy as the barometer of our country's financial health. If you think of the US economy as a company and look at our financial statements, they don't look very healthy at all.

Peter Schiff talks about 'getting real' on deficits, and a recent Federal Reserve report by Lawrence Kotlikoff asks the question: Is The United States Bankrupt? Because the US Dollar has been the world's reserve currency for most international transactions, we've gotten away with this excessive borrowing and spending at the household, corporate and government levels.

Unless my economic history is wrong, I've never seen any country or company borrow and spend their way to prosperity. I realize the economy is chugging along pretty well now, but I'm bracing for the day when the US has to pay the pipers who have financed our paper prosperity.

Real vs. Financial Economies

2006-10-05T11:03:00.000-07:00

Russ Randall has an excellent article from his Austrian Enginomics site that talks about this. My simple definitions are this: The Financial economy is based on the increasing valuations of assets - mainly paper assets such as stocks, and real estate (which the increase is based on cheap credit and mortgages).

The "Real" economy is based on actual savings, investment and profits from the private sector. A good example of the contrast between these two concepts is General Motors. Although it's losing over $10/share, GM's stock price has increased from $19 to about $33/share in 2006.

This is due to speculation that a 'white knight' such as Nissan will merge with GM and temporarily relieve their financial problems that include high levels of debt, and large pension liabilities. It's a short-term fix that doesn't address poor management, dwindling market share, and a heavily indebted US economy and consumer.

Even though the Dow has reached a new all-time high, I don't buy into the 'fact' that it reflects a healthy economy. The American economy today is like a exquisitely-furnished home with plush carpeting and beautiful hardwood floors. However, if you look at the home's foundations, you'll find these wooden beams shaky because of severe damage by termites - or in this case, debt.

That's what the high levels of debt do to a company and a nation. It's like a long-term financial cancer that gradually spreads. Once the damage is realized, it takes a long time to undo the damage, and a long time to get back to good financial health.

Classic Case of Complacency?

2006-10-04T10:33:00.000-07:00

Martin Weiss has a good take on investors' opinions of GM and Ford. The same can also apply to the recent (and welcome) drop in crude oil and gasoline prices.

Don't get me wrong - I'm glad to see $2.50 instead of $3-something/gallon gas. I'm just not sure how long it'll last. Check out the recent FSO interview with Matthew Simmons, energy expert and author of the book Twilight In The Desert.

Howard Ruff on Gold and Silver

2006-09-19T12:32:00.000-07:00

Here's what veteran financial analyst and commentator Howard Ruff says about investing in precious metals:

"The worst financial decision you could make in 2006 is to ignore gold and silver. This one mistake will cost you more than all the dumb financial decisions you can make put together. Gold and silver are now early in a historic bull market that will dwarf the 500-1700% profits we made in the 70’s.

"...The forces that took gold and silver into the stratosphere in the 70s are back in spades, only more so. Several times more so!"

Click here to learn the reasons why Mr. Ruff is super-bullish on gold and silver.

Real Estate Becoming A Liability

2006-09-14T09:15:00.000-07:00

This article by Danielle DiMartino in the Dallas Morning News sums up my opinion on real estate pretty well.

Why Real Estate Won't Bounce Back Quickly

2006-08-21T14:09:00.000-07:00

Here in the Denver-metro area, the real estate bubble has officially popped. Foreclosures have steadily increased, and I've talked with real estate agents and a VP of a title company to confirm this fact. Spoke with a realtor a couple of weeks ago, he knew another realtor who had 265 listings, but not a single phone call for any of them.

The Vice-Prez of the title company said that closings have been "dead since the first of the year." By listening to all the mortgage ads on the radio, you'd never guess this was the case. They'd have you believe that the good times are still rolling, and you need to re-finance, extract equity from your home, and my favorite line: "Use your mortgage to pay off those credit cards, auto loans and other debt!"

Just like going out of the frying pan and into the fire. The low level of financial literacy in America simply amazes me. Not just with these dumb radio ads, but the underlying belief most folks have that the real estate market will "bounce back" in 6 months to a year, just like their favorite dot.com stock rebounded in the late 90s. I look at the current economic and financial situations in America and around the world, and I'm just not seeing a quick bounce-back in the works.

I try to be optimistic and balanced in my view on financial topics. As I analyze the situation, here are the main reasons why the real estate recovery could take longer than expected:

1) High levels of consumer and other debt in America. The motto for most Americans seems to be "It don't mean a thing if you ain't got that bling." During the last recession in 2001, it was a perfect opportunity for consumers to 're-trench' by spending less and saving more. When Greenpsan lowered interest rates to all-time lows, that gave consumers the green light to go on a spending spree. Until a good chunk of this debt is cleared out of the system through repayment or default, I don't see most Americans being able to borrow more money and buy even bigger McMansions.

2) Rising interest rates from the Federal Reserve. Ben Bernanke is in a tough situation - if he raises rates too far, he runs the risk of throwing a debt-dependent US economy into recession (if he hasn't already). If he doesn't raise them enough, he risks losing the confidence of foreign lenders to provide more credit to keep our economy going. Bernanke will probably be the 'fall guy' when the next recession hits, but history will show it was Alan Greenspan who sowed the seeds of economic destruction by providing plenty of easy money.

3) Outsourcing of blue and white-collar jobs to Asia and Latin America. Today most Americans depend on an employer for their income. Unfortunately, job security isn't what it used to be 20 or 30 years ago. This combined with global downward pressure on wages isn't a bullish factor for American's income levels - unless they learn how to make money other than working for someone else.

4) High inflation caused by the Federal Reserve. As inflation eats away at consumers' purchasing power, it'll make it more difficult for the average American to keep his high standard of living.

I hope I'm wrong on these facts, but my financial hunches have been fairly accurate over the past few years. I don't know when the real estate boom will come back, but based on my analysis, it'll probably be longer than most people think.

Timing Is Everything

2006-06-28T14:00:00.000-07:00

Lately I’ve been thinking about investors’ perceptions of the stock, bond and commodity markets and how this affects their investing decisions. Most people focus on and invest in the equity markets because that’s what most daily financial news from CNBC, Bloomberg, etc. talks about. Every day you hear about the movement of the Dow, Nasdaq and S&P 500 indices, usually with commentary from stock analysts explaining the reason(s) behind these daily movements.

The only problem of being focused on the equity markets is that I believe stocks are in the early-to-mid stages of a secular bear market, where stocks could go sideways (+ or – break even) or experience minor to significant losses. Investors can make money in stocks and stock options, but only if they really know what they’re doing and do sufficient research.

I believe that most people aren’t true investors because they can’t accurately read a company’s financial statements, and they invest based on a hot tip or the latest ‘booyahs’ from Jim Cramer. Stocks don’t always go up or down in the short-term based on fundamentals – that’s where good technical analysis comes in. Just as in life, timing is everything… especially with regards to investing.

Winston Churchill once said, “The farther back you look in history, the farther ahead you’ll be able to see.” If you look back to the 1970s, you’ll see similar parallels to today: Rising inflation, higher oil and gas prices, a weakening US Dollar and stagnating incomes. These factors fueled the commodity bull market in the Decade of Disco.

When I hear someone say they know of a great stock or mutual fund, to me that’s like someone saying they have a great horse and buggy. It’s a slow vehicle that won’t get you to your destination as quick as a car will. Most mutual funds and stocks will be poor financial vehicles for investors to reach their goals in the next 10-15 years. I believe that physical gold and silver will be more profitable and safer choices than most financial paper assets.

Robert Kiyosaki, best-selling financial author, also concurs in two of his Yahoo Finance columns here and here.

To be a successful investor in today’s investing environment, you need to be financially and economically literate. You must be able to accurately read and interpret financial statements. If you don’t know how, I’d suggest you buy the book Rich Dad, Poor Dad, and play a board game called Cashflow 101. It’s like a real-life version of Monopoly that’s fun to play. It also teaches you how your financial statements (income statement, balance sheet and statement of cash flows) are affected when you take certain financial actions.

Once you get financially literate, you’ve got a good foundation to get economically literate, which will be the topic of my next post – stay tuned.

Why Commodities Aren't In A 'Bubble' Market

2006-06-16T09:13:00.000-07:00

Some commentators have described recent action in the commodities market as a mania or 'bubble,' similar to the late 90s craziness in the dot.com stocks. Peter Schiff gives a good explanation of the short-term downturn in almost every asset class across the board.

While the price action has been extremely volatile, and metals prices have corrected violently to the downside in recent days, I believe that commodities are in a long-term secular bull market that will last at least another 10-12 years. Jim Rogers, billionaire investor and former partner of George Soros in the Quantum Fund said this back in early 2005.

"People have come to think [stocks] are okay again. They're not," said Jim Rogers, co-founder of the Quantum Fund and author of three investment books, Adventure Capitalist, Investment Biker and Hot Commodities...Historically, commodities and stock prices have moved in opposite directions. "In my view, we're in that kind of period again where essentially we're going to be having good commodity markets and sloppy stock markets," he said.

Here are my reasons why I agree with the Investment Biker.

First of all, central banks around the world are all inflating their currency, trying to weaken them so it's easier for other countries to buy more of their goods. This helps boost the current account (or trade) figures, hopefully resulting in a surplus instead of a massive deficit like the US currently has. Although the US has promoted a cheap dollar policy, it hasn't worked to generate a trade surplus, and probably never will. That's because we've outsourced our manufacturing base to Latin America and Asia, and it's a structural imbalance where China, Mexico and other countries make and sell more stuff to us than we do to them. If it weren't for agriculture and media exports, America would have an even higher Current Account deficit.

I know some of you reading this are totally in love with your stocks and mutual funds, probably still watch and listen to Jim Cramer's 'Mad Money' show with baited breath, and would almost never consider investing in commodities because they're 'too risky.' You may still believe what Wall Street and your broker tell you, and I can almost repeat it verbatim: "On average over the 'long haul,' the stock market goes up 7-8% a year. Keep dollar-cost averaging into the market, ride out the rough patches, and everything will be A-OK."

Speaking of averages, Mike "Mish" Shedlock at Whiskey and Gunpowder has a great column on averages, and how they relate to current economic conditions.

Back to Wall Street, stocks and averages. If you still believe that the stock market will keep going up 7-8% a year with the insane amount of debt at the government, corporate and household levels, I'll bring the Tooth Fairy and the Easter Bunny to your house for dinner. As Warren Buffett says, "Stock markets are a voting machine in the short term, and a weighing machine in the long term." As more investors bring out the scales on some of these heavily indebted stocks like General Motors, they won't like the numbers they see.

I'll concede that the major indices have recovered from the 2002 lows and gotten almost back to even. I'll take a guess that most American's 401(k) and IRA statements haven't been much to write home about over the past 5-6 years.

Compare this performance to gold over the past five years. It was trading around $260/ounce, as of this morning it's at $571/ounce, more than doubled. The factors that supported this have been a weakening US Dollar, plus increased gold demand from China, Russia and the Middle East. Dubai even has it's own gold and commodities exchange. As investors and central banks lose confidence in paper assets, such as stocks, bonds, mutual funds (and even some currencies), they will (and are already starting to) reallocated their assets from US Dollars and Treasury notes into tangible assets such as gold and silver.

Will commodities keep going up forever? Of course not. No market ever does. For the forseeable future, (I'd say the next 10, possibly 15 years) commodities will be in a solid bull market, while paper assets will disappoint most average American investors.

Why I'm Still Bullish On Commodities

2006-06-13T16:24:00.000-07:00

Gold and silver markets were downright ugly today with gold plummeting $40 an ounce, and silver taking a $1.40/ounce haircut. Even with this short-term correction, I still like commodities over the long term. Here are my reasons why:

1) Commodities are still in the early to mid-stages of a secular bull market. Stocks and commodities run opposite of each other, and Wall Street had its days in the sun from 1982-2000. Historically, commodity and stock bull/bear markets run about 16-18 years in length. Gold was trading around $260 an ounce back in 2001, and is still at $560 after today's bloodletting. Silver was around $4-5 per ounce in '01, and trades today around $9.80.

2) The short-term correction is due to contraction in money supply by the Fed and Japanese Central Banks, and won't go on forever. I believe that American and other central banks are working together in coordinated actions to help out the US. Bernanke wants to skip a rate hike at the next meeting, but can only do this if inflation is perceived to be under control. The latest inflation numbers were a little higher than the Fed and other experts wanted to see, but with the recent plunge in commodities, they may be able to claim to Congress and the American people that inflation is in check and don't need to hike rates another quarter point in the short term.

3) America's glorious Empire of Debt. The US is swimming in government, corporate and household debt, and will need to inflate the money supply in the long run to attempt to pay this debt down in cheaper dollars. The problem with this is that American's purchasing power will be significantly decreased, and foreign central banks will accelerate their flight from dollar-denominated investments - namely stocks and Treasury notes.

4) The supply of commodities is finite, the supply of fiat-based money can be almost infinite. The world is entering the era of Peak Oil, where supplies and production of cheap, easily-accessible Black Gold are declining. Same goes for gold, where new discoveries of high-production mines are declining. However, the Federal Reserve - and other foreign central banks - can print money on a whim, and increase the supplies of their currency as much as they want. With more dollars in circulation, it'll take more of these dollars to buy commodities such as gold and silver.

5) Decreased confidence in financial paper assets. Stock markets around the world have been in decline, especially Dubai and Saudi Arabia. I believe we're entering a time where investors and governments will be more confident in tangible assets such as precious metals, and less confident in stocks, bonds and certain currencies. History shows that when confidence is lost in paper assets, it takes a long time for that confidence to come back - if it ever does. Couple of prime examples are shares of Enron or MCI/Worldcom stock. I don't think any prudent investor would think about investing in either of these stocks.

It may take a while for gold and silver to resume their bullish trends in earnest, you'll still be much safer investing in gold than in shares of Google. I also believe that long-term (over a year) call options on certain commodities are a good speculative play as well. Consult with a competent commodities professional before investing any money or executing a trade.

Here are a few good sources of investing news and articles online:

www.InvestmentRarities.com
www.Kitco.com
www.TheBullionDesk.com
www.DailyReckoning.com
www.321gold.com
www.PrudentBear.com

If you don't have or know of a good commodities broker, check with Nell Sloane and NS Futures: www.NSFutures.com. They're good people that know their business well.

Investing in commodities does carry risk, but will give investors a hedge against inflation and potentially good rewards for being patient. Don't just throw your money blindly into ANY investment. Take the time to do your research, talk with at least one (and preferably several commodity brokers) and know what your short, medium and long-term investing goals are.

I'd recommend buying physical gold and silver with 15-25% of your investment portfolio, holding some in non-US Dollar cash, a portion in gold stocks, and another small portion in well-selected (longer than a year) commodity options. Options are a way to use more investment leverage with minimized risk.

Again, this blog post is solely my opinion and may or may not be applicable to your investment situation. Conduct your own due diligence and consult with one or more investment professionals before making ANY investment decision.

Ben Bernanke - Walking The Line

2006-05-24T11:29:00.000-07:00

I don't envy the position that our current Federal Reserve Chairman is in right now with regards to interest rates. He probably knows that he should increase the Fed Funds rate more than 5% to defend the dollar on world currency markets. However, he also knows that if he raises rates more than 5%, he could throw the US economy into recession, because of our dependence on cheap credit. Senators let him know this fact at his last visit to Capitol Hill.

The US is so heavily indebted at the household, corporate, state and federal government levels that the financial day of reckoning is inevitable. For the short-term, my guess is the Fed will probably go 'on pause' at the next FOMC meeting, (maybe even the next two) and keep the Fed Funds Rate at 5.0. Keep in mind the Fed stopped reported changes in M3 money supply back in March.

They probably did this so foreigners and other central banks wouldn't know how much monetary inflation they're creating. History shows that when inflation goes up, so do interest rates. Because of this, they may be forced to resume rate hikes - even in an election year, and over the protests of Congress and the President.

When this happens, adjustable-rate mortgage, credit card and auto loan payments will go up. The prudent move for Americans today is to get the heck out of debt, and don't incur any new debt. I know, you won't be keeping up with the Jones and their 'bling-fest,' but that's alright. You'll sleep better at nights, and won't have to worry about rising rates or payments in the future.

Sensational Silver!

2006-04-12T14:27:00.000-07:00

Silver has absolutely skyrocketed in price in 2006. As of this afternoon (Wednesday, April 12th), it's trading at $12.73/ounce, up over 35% since the start of the year. The reasons for it?

First, we have the Fed inflating the money supply like crazy, strong fundamentals of high demand and tighter silver supplies, plus anticipation of the new silver Exchange Traded Fund (ETF) on the American Stock Exchange. Carl Lofberg at KultaKeskus.com explains it further: http://www.kultakeskus.com/20060409_silver.htm

Not to mention geopolitical nervousness in Iran, with the mad mullahs proclaiming yesterday they have the ability to enrich uranium: Definitely interesting times we live in...

The China Challenge

2006-01-12T14:00:00.000-08:00

Congressmen in Washington DC have considered 'punishing' China for having such a large trade deficit with the United States - either through trade tariffs, or forcing them to revalue their currency. Politicians say this because they don't know any better, and/or they're trying to score political brownie points with their consituents.

It sounds good at first glance, but it's a terrible idea for these reasons:

1) China is the 2nd largest holder of US Treasury notes (debt) at around $600 billion. Japan is #1, holding approximately $1 Trillion. If the Chinese get tired of lending us money, all they have to do is not make future purchases - or worse yet, sell even a small portion of their Treasury holdings. Interest rates on these 10-year Treasuries would spike very quickly, and so would most mortgage rates. It has the potential to hammer the residential real estate market - literally overnight. Cheap mortgage money and speculation are the big reasons for the real estate mania/bubble/craze. It's darn sure not fundamentals.

2) The big reason for the trade deficit is structural - China has a large and growing manufacturing base, America's manufacturing base is in decline. I agree that China's currency is very undervalued compared to the US Dollar, and that's helped fuel the large trade deficit. Over the past two decades or so, its been a gradual process. Economists actually believed that the US didn't need the manufacturing base for a healthy economy; we'd just make it up in services.

The problem with this theory is that more of our service base is going overseas - mainly to India, where a large number of well-educated, English-speaking workers are ready, willing and able to do the same work at 10-20% of what Americans will do it for. It will take many years - if not decades - to regain our manufacturing base.

China is making and selling Americans more goods than America is selling the Chinese. It's as simple as that. Until US companies re-commit to rebuilding a solid manufacturing base in America, this will continue to be a problem.

3) The Smoot-Hawley Act helped plunge the US into the Great Depression in the 30s. Legislating a 2006 version of Smoot-Hawley is economic and fiscal insanity. Especially when you're trying to strong-arm your 2nd biggest lender to do things your way - and you don't have any leverage. A verse in Proverbs says, "The borrower is servant to the lender."

China will eventually revalue their currency to a more 'fair ' rate. Some Americans should be careful what they wish for. When the Chinese do this, it will increase prices on imported Chinese goods. The doo-dads and geegaws that were cheap at Wal-Mart will be more expensive. Since consumer spending makes up about 70% of GDP, that will slow down the economy. The economic correction and strong financial medicine will have to be taken - it's just a matter of being sooner or later.

No country can borrow and spend their way to prosperity. Lord knows Americans are trying their darndest to make this work. A household, business or government can only prosper when there is real savings, investment and profits. When you borrow and spend too much, you eventually will pay the piper. Or in this case, VISA, Washington Mutual and GMAC.

There won't be a quick fix for the trade or budget deficits. Americans will be forced to go back to these old-fashioned economic ideas (instead of a borrowing and spending blingfest) if they want to see things improve.

2006 - The Year Debt Finally Matters?

2006-01-10T11:23:00.000-08:00

Most economists have been gushing about how 'resilient' the American consumer has been, and how great this has been for the US economy. That's true, since consumer spending makes up 67-70% of America's GDP.

The only problem with this is debt has to be repaid, or defaulted on. Manic borrowing and spending by consumers, corporations and government has led to an economy 'juiced up' with financial steroids. Like an athlete who's performance slips after he (or she) goes off the juice, I see the American economy being less buff in 2006.

The debt and real estate bubble has gone on much longer than I thought it would. It proves the old saying correct: "The market can remain illogical longer than you can remain liquid." Luckily, I didn't lose any money shorting stocks during the last few years.

How will this house of credit cards, mortgages and car loans come tumbling down? It's hard to say, but I think we're starting to see the decline in certain areas. Foreclosures have been increasing in the seven county Denver-metro area, and hit their highest level since the oil bust days of 1988. General Motors recently announced they're lowering prices on new cars and trucks.

GM realizes that consumers aren't buying cars the way they used to, and GMAC probably wants to minimize its risk exposure to high balance loans. On top of this, Fortune 500 companies are outsourcing more white-collar service jobs to India. With American workers' incomes stagnating, and expenses going higher because of inflation, we're seeing that rare economic creature that hasn't been seen in the US since the 1970s.

It's name? Stagflation. These conditions fueled the last big commodities bull market during this decade of disco. Gold hit a peak around $850/ounce in 1980, and silver topped at around $50/ounce until the feds put the kibosh on the Hunt brothers.

A wise man once said, "History doesn't repeat itself, but it usually rhymes."

These economic tunes from the disco and today's techno times sound very, very similar. That's why I'm very bullish about gold and silver, along with well-managed energy and metals stocks and funds. That's all for now, until next time...

Welcome and Happy New Year!

2006-01-04T11:43:00.000-08:00

Thanks for coming to my blogsite! The goal of this site is to give you the best economic and financial information that's based on fundamentals from an Austrian economic point of view.

What is Austrian economic theory compared to Keynesian theory? Keynesians believe that if a government can simply borrow and spend enough money, that's enough to keep a country's economy out of any recession. The problem with this view is that eventually you have to pay this incurred debt back, and it wreaks havoc on your country's budget.

The Austrian view is based on 'hard money' (i.e., currency backed by gold and/or silver), and sound fiscal policy. Namely keeping borrowing and spending to an absolute minimum. Most modern economists don't see anything wrong with running huge federal budget and current account deficits. Heck, we've run them in the past and nothing bad happened - right?

True, but eventually you have to pay interest on these deficits and debt. These conditions also contribute to inflation of your currency, lowering the purchasing power of each dollar you hold. As a country, we're in very interesting economic times. There will be challenges in the future, but also great investing and business opportunities.

I'll go over these scenarios as I see them in future posts. In the meantime, I highly recommend you check out several websites:

www.DailyReckoning.com
www.FinancialSense.com
www.investmentrarities.com
www.321gold.com

All have excellent analysis and commentary on economic and financial issues. Best Wishes for a Happy, Healthy, and Prosperous 2006! Until next time...