Reiznersway Investment Articles

America's Economic Future: May We Lose Complete Control over our Destiny?

Fri, 10 Jul 2009 18:33:46 -0800

Could it be possible to think in our current economic times that America may lose complete control over its own economic future? Has an economic and financial process begun that may not easily be undone that could threaten the very core of what is left of our economic, financial and social well-being?

I believe one big problem lies with the pyramiding of debt over decades by our elected officials: the rapid expansion of the United States public debt and our country's expanding yearly budget deficits. The national debt is now $11 trillion. Wikipedia states that under the 2010 Obama budget projections, the debt is projected to reach $20 trillion by 2015, but is expected to increase to nearly 100% of GDP by 2010 and remain at that level. Vice President Joe Biden has now admitted to miscalculating the "strength" of the potential recovery. All bets are off. And that is what I believe the Obama stimulus plan(s) are doing: adding to our debt and betting our future on failing companies and industries.

The federal debt explosion may lead in time to more severe consequences for the dollar (the dollar index is currently at 80.05). Our dollar is debased by excessive Federal Reserve money creation which eventually causes inflation. A sharp upward revaluation of gold and silver, food prices and medicine may accelerate once the economy responds to the printing of money out of thin air and debt monetization. Can you imagine paying $10 for a gallon of gas? When I was a child, my father complained about 29 cent-a-gallon gas! The oil companies do not have the license to print money. The government does!

We did not vote out of office the many legislators (both Republicans and Democrats), who voted for toxic spending programs over the years, even while those programs were effectively maxing out our country's credit cards. Many programs created in the Great Depression of the 1930's are still on the books, long after the recovery from that prolonged slump. The depth and suffering of the people in the Great Depression is general knowledge. But that terrible time's economic and social duress may have been prolonged for years because of the very programs which were intended to cure it!

The depression of 1921 may be highly instructive to our current predicament. It is only being explored in greater detail now because it was over so quickly! This was a dramatic deflationary slump which was quite severe. The Wikipedia Free Encyclopedia states that the fall in the GNP price deflator from 1920 to 1921 was the largest one-year percentage decline in over 120 years. This is greater than the Great Depression of the 1930's!

Wikipedia further states that a robust recovery followed the deep deflation of 1920-1921. In the 22 months after the economy bottomed, industrial production rose over 60%, the money stock expanded by double digits, and wholesale prices rose by 9%. Net national product rose over 20% in the corresponding two calendar years.

The economy's sharp recovery has been attributed by some economists to President Harding's non-interventionist economic policy and fiscal restraint (he sharply downsized federal spending). This is the exact opposite of what is being done today under President Barack Obama and what was done under both Bushes. The Federal Reserve did not become active in open market operations until after the 1921 recovery, so the Federal Reserve did not play a part in this remarkable recovery. Again, Federal Reserve intervention on a large scale (such as we have seen under Alan Greenspan and Ben Bernanke) did not play a part in the splendid economic recovery seen after 1921).

This episode is a wonderful example of the success of Joseph Schumpeter's "creative destruction," where in an economic downturn the declining businesses simply fail and economic resources are reallocated to successful businesses so that the winners get the economy going again. This is certainly a better alternative than having our economy possibly go through a prolonged depression.

George Soros, now re-retired from managing his hedge fund enterprise, stated in an interview on Chinese television that the cost of creative destruction has been too too great. Soros mentioned that he had had a dinner engagement with Alan Greenspan, a believer in Schumpeter's theory. During the dinner, Greenspan recanted his belief in the theory, indicating that this time the cost had been too great. Soros stated in the Chinese television interview that the failure of Lehman Brothers was a "game changing event," and it was the time for the Federal Reserve and the regulators to step in to stop the carnage.

It may have turned out better if our leaders simply let the losers take their losses and not have the government simply print money with less and less value to pay our bills and to "stimulate" losing industries. We could have avoided spending hundreds of billions on bailing out AIG and other firms (AIG's chairman was reported to have said that maybe the company should have been allowed to fail). Our economy may have righted itself in a shorter time. Are we really economically better off now for all the bailouts? Let's just take our medicine and be done with it so we can move on and recover just as the economy did after the 1920-21 depression.

Warren Buffett, on the other hand, believes that Bernanke has been doing a good job in his intervention in the economy. It is conceivable to me that if many major institutions had been allowed to fail, the Dow Jones average may have fallen a great deal further than 6469.95, the low it hit in March 2009, but there may have been an accelerated stock market and economic recovery out of the abysses once economic resources were reallocated to winning businesses and the federal government was perceived worldwide to be solvent. Instead we are now rewarding the losers with huge amounts of money and many nations with large pools of dollars are looking for an exit strategy to get rid of their dollar reserves. This potentially puts our society's economic and social fabric at risk.

I believe that Americans were in denial regarding the consequences of buying houses with no-money down. Indeed, many banks were overly aggressive in offering no-documentation loans. Wall Street was complicit in securitizing those mortgages, "taking away" the risk from mortgages which had faint hope of being repaid. It is true that many on Wall Street attempted to reduce their risk exposure through complex, privately-traded derivatives which blew up when the subprime crisis hit. These bets exploded in a very nasty way, as we all know today.

We may be facing significantly higher inflation rates than we would like to admit in the future if we do not elect leaders who will not squander our nation's resources. During the latter part of the 1970's, inflation rapidly accelerated into double digits and interest rates soared to 21%. I recall at the time walking into a major New York City bank and being offered a 19% return on one year commercial paper. The banker, who sat behind a spacious desk with no personal computer (they weren't around then!), told me that the bank would not offer longer terms than one year on such an investment. That may be true of commercial paper, but in the 1970's, 30-year triple A rated United States Treasury bonds lost almost half their par value of 100 as interest rates soared skyward. That could happen again, or worse.

We are now monetizing debt in a manner similar to what led to the great inflation of the 1970's. The difference is that at that time we were the largest creditor nation on earth. Now we are the world's largest debtor. The well has run dry. We may be in for tough times ahead if we do not elect leaders who will responsibly take care of taxpayer money. Ron Paul has said he does not want to interfere with the Federal Reserve operations. He just wants to know what they are doing.

Paul Volker was appointed as Federal Reserve Chairman in 1979 to stop the inflationary economic mess, and fortunately, he succeeded by tightening the money supply. Though this led to a very deep recession, it cleansed high inflation from the economic system. The economy proceeded to have almost twenty years of non-inflationary growth. It would be very surprising if he could return to the position when Bernanke's term expires in January 2010.

The 1980's-1990's expansion was interrupted by the 1987 stock market crash (which was in the context of a long term bull market in stocks), and a banking and real estate depression in the early 1990's where many bank shares were available at bargain prices. Such bank shares such as Wells Fargo in 1992 and others multiplied in value many times during the 1990's. The difference between now and the prior 1982-2000 equities bull market is that we appear to still remain in a secular bear market, though inflation hedges may outperform in the coming years.

I will not speculate on the next month's direction of the gold and silver markets, but the fundamentals at this time appear to make a strong foundation for higher prices over the next few years. The 1970's gold and silver bull market lasted ten years with a sharp drop in gold and silver prices at mid decade. This mid-decade correction in the metals complex coincided with a severe bear market in equities in 1973-74. However, the stock market did bounce back, while the metals and oil surged for the remainder of that inflationary decade.

The current gold and silver bull market that began in 1999 is approaching the duration of the 1970's bull market. No one cannot know for certain whether the continued buoyancy in gold and silver prices over the years will accelerate and continue beyond the ten year term of the 1970's bull run. No one knows for certain whether the gold market (currently at $913 per troy ounce) may hold in this range or decline before a potential price expansion. But as I see it, the fundamentals of the gold and silver markets appear to support an extension of their ten year bull market. Again, fundamentals can change and technical support levels are regularly violated in all types of markets. But under the scenario that I foresee, conditions appear to support further price expansion.

Our economy may be experiencing the beginning of a powerful monetary inflation in the midst of the morass in which we find ourselves. This may take time to develop. Indeed, it is possible for an economy to be experience recession and monetary inflation at the same time. Once inflation starts, it is difficult to stop.

Ownership of physical gold and/or silver may be excellent investment strategy to hedge one's portfolio against the potential for future inflation and economic disruption. Yet, Americans may still have time to mitigate the situation. If enough people demand that our elected officials rein in unnecessary spending and bailouts, we may recapture our economic future. If President Obama appoints a Federal Reserve Chairman in January 2009 who would strive to maintain the integrity of our money, then we may have a better chance at securing our economic destiny. We may need to uproot some of President Obama's "change" to secure our economic security.

I have further rebalanced my portfolio by selling gold bars, though I still retain gold bar and silver bullion positions. I have added agricultural, silver and natural gas ETF's to my portfolio. I continue to own shares in major integrated oil companies, a major oil service firm and a gas pipeline company. Other positions include various common stocks, mutual funds containing various domestic and foreign equities and the Franklin Templeton Hard Currency Fund.

Related posts:

Inflation Hedge Strategies and Thoughts for 2010 and Beyond

posted June 2, 2009

Obama and Bernanke May Destroy the U.S. Dollar to Repay National and Foreign Debt

posted May 22, 2009
How to Invest in Barack Obama's "Workers Paradise"

posted March 13, 2009

Why Gold May Begin the Last Leg of its Bull Market Sooner Than You Think

posted February 23, 2009

Why I Sold Part of My Gold Position after a Six Year Hold

Tue, 23 Jun 2009 22:10:16 -0800

I bought gold bars and coins in 2003 at $354, $377 and $383.50 per troy ounce, and in 2004 at $431 per troy ounce. I purchased gold coins in 2009 at $1000 per ounce. I also purchased silver bullion this year.

I am continually reevaluating my gold and silver positions to account for changes in the market. The gold market, as I stated in my previous blog entry (see related posts below), emerged from a large flag formation on the weekly chart when the gold price on the August 2009 contract rose from $900 in January of 2009 to a high of $1006 the following month and then retreated. It has since made another run at the February high which is unsuccessful as of this writing (that may change).

In my article posted in October 2007, when the gold price was trading at $753 per ounce, I concluded that there were three possible scenarios for the future of the gold price:

The first scenario was that following the surge in the gold price in 2007, the gold market had potentially reached its peak, or the eventual high might be around the 1980 peak area of $850 per ounce. After that peak, excitement in the metal could stall and the gold price might then retrace its steps. I assigned a lesser probability to this outcome, and so I maintained my gold positions.

The second scenario posited that the gold price would challenge the 1980 high of $850 and then would temporarily retreat while testing the $850 area multiple times before pushing through it on the upside to new high territory. I assigned a greater probability at the time of the article to this scenario. This in fact has occurred, and the gold market rose to new all time highs.

The third scenario rested on looking at the performance of the gold price during the 1970's when there was a ten year bull market in gold (gold went from $35 in 1971 to $850 in 1980 during a period of high inflation). This rise was punctuated in 1973-1974 by a deep recession when both gold and the stock market lost half their value. Gold later recovered spectacularly in the late 1970's as gold, gold stocks, oil, and oil service stocks performed very well. If this were to happen now, gold could potentially rise significantly higher than the $753 per ounce at the time of the 2007 article. At the time of my 2007 article, I assigned a greater probability of the second or third scenario occurring.

The 1970's bull market in commodities lasted ten years. The current bull market in commodities which began in 1999 is now of similar length. Thus, I would expect a potential blow-off peak in gold sooner rather than later. The gold price may break out of its $1006 high and move boldly into new high ground, taking silver along for the ride. If this is true, the question is how high will the price go? I answer that no one really knows for certain.

But is there a possibility that the gold rally could stall out around the current level of $924 or even at $1100 or $1200 per ounce should it break out of its current range? I refer to the very wise words of the late Sir John Templeton from a January 2005 interview when he foresaw the end of the housing bubble. During the interview, he stated there were almost no equities bargains worldwide, and that the gold bull market was more than half over (the gold price was around $400 at the time of the interview). He had been quoted to have said, "bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria."

Could a potential blow-off top in the gold and silver markets represent the euphoria into which savvy metals holders could sell? Sir John Templeton was by some accounts the greatest investor of the 20th century, and so I take his insights to heart.

Yet, the fundamentals of the gold market still appear to be extremely healthy. The ever growing budget deficit of $1.8 trillion and escalating public debt threaten to further unravel our financial system. There has been near systemic economic collapse in our financial system, at which the authorities are throwing money. As most observers can see, the Obama administration is spending with only symbolic fiscal restraint (betting the farm!) and may not be able to take back that money without sizeable tax increases.

As I see it, the problem with gold now is that it is too well known and popular as an investment. It appears that we are in the optimistic stage. That does not mean that gold does not have further to move upward. But it is not the bargain that it was when I bought it six years ago.

The hard money advocates (including this writer) have been pounding the table on the metal for years. And fundamentally, the economic situation may be extremely constructive for gold. If the gold price breaks into new high ground, there may be nothing stopping it from repeating what happened in 1978-1980 (the gold price jumped fourfold).

But there is no guarantee. I attempt to practice diversification in my portfolio. As I already hold many inflation hedge investments, I have reduced my gold position to rebalance my portfolio. I am placing the funds received from the sale of part of my gold position into a money market fund until I decide where to invest it. I continue to hold silver bullion and the remainder of my gold.

Related posts:

Gold Price Shines and Takes a Breather: Is There More Upside to Come?

posted March 3, 2009

Why Our Economy Will Not Prosper Until We Have Hard Money and How You Can Profit From It

posted January 13, 2009

Stocks, Gold, Oil, the Dollar, and Inflation: A Potpourri in the Current "Unwinding of Debt" Crisis

posted September 16, 2008

Bulletin: October 24, 2007 - What Now on Gold?

posted October 24, 2007

Inflation Hedge Strategies and Thoughts for 2010 and Beyond

Tue, 02 Jun 2009 11:58:12 -0800

See specific inflation hedge strategies

It is widely known that government authorities across the globe are attempting to pump prime their nations' depression-racked economies by printing vast sums of paper money. Some nations, including the United States, are running trillion dollar deficits and will go deeper into debt in future years in order to finance an expansion that may not materialize as planned.

If we reach that point where the pump priming from the Fed and the fiscal excess of the government fail to keep the economic shell game going, the financial markets may lose greater confidence in our dollar (the dollar index is currently at 79.19 on June 1, 2009), Treasury bonds and stock market {Dow Futures at 8688 {(though the stock market may move higher as it has exceeded its 200 day moving average: a widely watched indicator)}.

In this scenario, the federal government might potentially lose what limited influence it currently has over the future of our economy. I wrote about the possibility of this loss of confidence before the U.S. Presidential election in an earlier article on the potential effects of an Obama administration on our financial markets (see related articles below).

But the government appears to have a plan to get us out of this mess. By printing money at an unprecedented rate and increasing public indebtedness, our leaders may believe our economy might be lifted. At that point, the Federal Reserve could withdraw its monetary ease once the recovery seems solid, giving us an economic recovery without great inflation.

I have written consistently over the last two years that I thought we may be in store for a 1970's double digit inflation and stock market decline. Even the oracle of Omaha, Warren Buffett, an Obama supporter, stated in a recent interview on a major financial news network that we could experience in the coming years a wave of price inflation that could match the 1970's embedded inflation. Or, he stated, it could be much worse.

If the Treasury runs out of fiscal ammunition and the Federal Reserve cannot give up on monetary ease because of the state of the economy, then I agree that the inflation could be much worse.

How can one protect one's portfolio and family from the potential ravages of a great inflation? I saw years ago that our commodity bull market had begun in 1999. Inflation and the oil and gold markets were rising and I looked back to the 1970's stagflation era for lessons that I could use from that time to benefit from those trends.

At that time, gold and silver rose powerfully (gold ran from $35 per troy ounce in 1971 to $850 in 1980 and silver ran from $2 In 1973 to $49 in 1980), oil and oil service companies soared (oil surged from $3.50 per barrel in 1970 to $40 per barrel in 1980), interest rates soared to double digits as many long term bonds lost half their value, and the Swiss franc was highly regarded as a hard money investment against a falling dollar. Were it not for the monetary discipline of Fed Chairman Paul Volker in the early 1980's, we might have entered hyperinflation at that time. We may need Paul Volker's monetary discipline again.

Gold and silver may be poised to accelerate their rallies (gold is currently priced at $977.90 per troy ounce and silver at $15.60). There has been a great deal of discussion that potential IMF gold sales could harm the gold market, but I believe that if the sale goes through and there is a negative effect on the market, the decline would (i) likely be temporary, and (ii) represent a potential buying opportunity. I have owned gold coins and bars for over five years, which generally act as inflation hedges in the event of sharply rising consumer prices. I have invested in silver bullion in the last two weeks.

The price of oil has rallied from below $40 to over $68 per barrel. It may continue its rise to the $80 per barrel range. I am holding my investments in major multinational oil firms and established oil service companies.

The September 2009 30-Year T-Bond futures lost more than three points on June 1st, settling at 114.18. It appears to be entering an area of price support on the weekly and monthly charts with many market participants expecting increasing inflation down the road. There has been a five month sell-off in long term bonds, which inversely means interest rates are going up.

I missed my chance to refinance my mortgage, but I think keeping a fixed rate mortgage with a stable payment is best if you can do it. I am avoiding long bonds, and I have sold my mutual funds that had greater exposure to longer maturities.

There is now much justified concern about the fate of the U.S. dollar, which is under pressure due to our government's decades of borrowing overseas to finance our citizens' consumption and the severity of our economic crisis. Many participants are worried that we are at an inflection point: that the dollar may go into freefall. I have heard one commentator who has stated his view that there may be a managed decline of the dollar. In a previous article, I have stated my opinion on the monthly U.S. dollar index chart. In 2007, we fell through a twenty year shelf of support at approximately 80 on the dollar index. In late 2008 and into 2009, we rallied back into that previous support area and have in May 2009 resumed the decline.

I continue to hold the Franklin Templeton Hard Currency Fund and for now the CurrencyShares Japanese Yen Trust to maintain asset diversification. Both potentially benefit from a falling dollar. I also own mutual funds which invest in foreign stocks.

In the resolution of today's crisis, Americans ought to come together to solve our problems as a people without great discord while protecting our government's ability to continue without running out of viable fiscal options.

Regarding our personal welfare, what can we learn from the actions of families weathering the inflationary economy of the 1970's? In the late 1970's, hard money newsletters were in the mainstream. Many households were buying gold, silver and even diamonds as hedges against inflation. Some citizens stocked up on canned goods and prepared to survive for the worst of times. Others rushed to buy goods to beat anticipated price increases.

Prices were indeed rising in the late 1970's, but famed commentator and investor Jim Rogers has stated recently that he expects food shortages in a few years with sharply rising prices for food. He states that presently farmers cannot get loans for fertilizer and equipment because of the credit squeeze. Consequently, he says that less food may be produced and there may be shortages in the future.

I would like to draw attention to the fact that commodities are notoriously volatile and can be known to turn on a dime. I will say that as long as our government can afford to continue its farm loan programs, then our farmers may be more insulated than elsewhere, but you may draw your own conclusion on that. Rogers is recommending, among other investments, an agricultural index.

All of us may be hurt to some degree by an embedded inflation, and many families may be hurt dramatically by such an event. In this environment, perhaps the best one can do is to hedge one's bets and plan for the possibility of future inflation. Should it come to pass, one may be more prepared to protect one's family and one's portfolio.

Silver Market may be Embarking on Important Price Rally

posted May 30, 2009

The End of the Dollar as We Know It?

posted April 13, 2009

Why Gold May Begin the Last Leg of its Bull Market Sooner than You Think

posted February 23, 2009

How Obama May Bomb the Stock Market and the Economy in 2009-2010

posted June 19, 2008

Silver Market May be Embarking on Important Price Rally

Sat, 30 May 2009 13:00:15 -0800

The silver market appears to have broken upward through important resistance at $15 per ounce on the weekly and monthly charts, closing at $15.73 per troy ounce for the trading month of May 2009. On both charts, it appears silver could reach as high as the $17-$20 range, with a potential blow-off top potentially reaching the old 1980 high range at $32-$42 per ounce. This may occur in the next one to two years, perhaps much sooner.

The use of price charts and similar analysis has key limitations, and no one can predict with accuracy short-term price movements. Nonetheless, the possibilities here are interesting.

Selected monthly silver futures rose over 2000% from $2 per troy ounce in 1973 to over $40 in 1980 as the Hunt brothers tried to corner the silver market at that time. We may see the silver market rise from $4 at its recent low in 2001, to up to one half that 1970's twentyfold percentage increase, to as high as $32 -$40 per troy ounce in the next year or two, or much sooner. This silver bull market might be of similar duration as the 1970's bull market, lasting from 2001 to 2009-2010.

It may be important that the silver price has closed near its high for the month of May on the monthly chart at $15.73. This has occurred as the silver price has broken through monthly chart resistance at the $15 level. As I have said, there appears to be little immediate resistance until the $17-$20 range. We may continue this upside push as the action on the monthly chart appears to show.

This portrait of the silver market concurs with my previous reiteration of the gold market dynamics (see related articles below), where I state that we may now be in the final upward acceleration phase of the gold market. In gold's earlier long term bull market lasting nine years, the gold price rose from $35 to $850 per ounce between 1971- 1980.

In the last two years of that gold bull move (1978-1980), gold multiplied from $200 to $850 per ounce in an explosive fourfold move. Silver traded at a reaction low of approximately $8 in October 2008. A fourfold increase in silver from that low might produce a potential bull market top in the $32 per troy ounce range in the near future.

Some fundamental economic and financial market factors may also be supporting the bullish push in silver. The U.S. dollar is declining sharply as I have written about repeatedly in my blog and articles. If the dollar continues downward as I expect, silver may increase in value as a harder money investment.

The Swiss franc, a traditional hard money currency, is nearing the top of an extended flag pattern on the weekly and monthly charts. A breakout here could potentially drive that currency much higher. The metals could also move upward further in this scenario.

Also, Bernanke's monetary ease may not be able to be easily reversed, perhaps adding further impetus to the metals complex and to the potential profitability of inflation hedges in general.

I have sold my remaining position in the Templeton Global Bond Fund while still holding my shares of the Franklin Templeton Hard Currency Fund. I have purchased silver bullion in the past week and continue to hold gold. I am looking for a bubble in the gold and silver markets to unload partial or full positions.

Gold Market Stategy: An Upward Price Acceleration May be Imminent

posted March 23, 2009

Gold Price Shines and Takes a Breather: Is There More Upside to Come?

posted March 3, 2009

Why Gold May Begin the last Leg of its Bull Market Sooner than You Think

posted February 23, 2009

Obama and Bernanke May Destroy the U.S. Dollar to Repay National and Foreign Debt

Fri, 22 May 2009 16:30:59 -0800

As the dollar begins to cascade down once again with the dollar index at 81.64, many market participants, including this writer, are coming to the conclusion that America's domestic and foreign debts will be repaid with dollars that are worth much less. Many participants agree that the U.S. Treasury bonds that we and other nations hold will end up being worth less in real terms (i.e., will be able to buy fewer goods and services), and perhaps a great deal less in future years.

That may be the greater fear of our foreign debt holders. Remember, in the last great inflation of the 1970's, many long term bonds lost half their value as interest rates soared into the high double digits.

The authorities are depreciating our money, which in turn may allow us to better service our national and foreign debt. Government is accomplishing this by effectively placing half of its living expenses on the credit card.

Warren Buffett in an interview with a CNBC anchor at the height of the credit crisis, noted that the future should bring higher inflation, perhaps greater inflation than the 1970's, and that fixed income investments will not keep pace with an embedded great inflation. However, Buffett also stated that individuals with skills to sell should be able to buy a can of Coca-Cola with an equivalent amount of their labor in the future as they do now. Buffett is confident that owning good American businesses will be profitable over the long run. He is not selling America short.

Jim Rogers[, a well-known investor and commentator,] has expressed his view that the stock market should turn down from its current level (the Dow Futures closed at 8295 on 5/21/09). He argues that the Federal Reserve has shown the financial markets a good time (temporary in nature) by printing trillions of dollars in an effort to stave off a U.S. economic collapse.

Rogers claims that he is not buying any stocks now, but that he is buying gold and silver. He believes that most currencies worldwide will experience depreciation in the future, but he thinks that the Chinese yuan will emerge over time as the next reserve currency.

No one can predict the future, but I am personally betting on a decline in the dollar, and have redeemed a significant portion of my investment in the Franklin Templeton Global Bond Fund (a fund which holds U.S. and foreign currency denominated long and shorter term debt obligations). In my view, future inflation and possibly much higher interest rates may deeply discount this asset. Higher worldwide inflation and interest rates should hurt most fixed income debt in almost all currencies.

I have owned physical gold [for a number of years], and have recently taken a position in silver bullion as well. I am anticipating an upward resolution to a potential bubble in the gold and silver market in the next two to three years, possibly sooner.

The End of the Dollar as We Know It?

posted April 13, 2009

The Future of the Dollar: Worth Less or Just Worthless?

posted April 6, 2009

Stocks, Gold, Oil, the Dollar and Inflation: A Potpourri in the Current "Unwinding of Debt" Crisis

posted September 16, 2008

The Ownership Society: Worthy Concept, Poor Execution

Sat, 09 May 2009 00:04:59 -0800

I am not a great believer in the governing abilities of our former President, George W. Bush, but I do think his concept of having wide swaths of Americans participate in an ownership society was a laudable goal. The concept included large numbers of Americans riding a wave of prosperity engendered through ownership in appreciating assets such as homes, businesses and retirement accounts. This was viewed as a ticket toward upward mobility. At least that was the theory.

The ownership society might have succeeded if human greed had not intervened. And maybe it will always be that way. Greed certainly took over as the managers, the caretakers of our stock market wealth, often leveraged their (and therefore our) investments in what turned out to be little more than a (not-so-well) calculated gamble. When assets prices eventually fell as the hoped for economic society unwound, and leverage backfired, their investors lost agonizing amounts of money.

And on the opposing side of human nature, fear may cause our leaders to overcompensate in order to resolve serious economic crisis, causing future problems. For example, after the stock market bubble burst in March 2000, Alan Greenspan brought interest rates down to one percent by 2003. By doing so, Greenspan probably laid the foundation for the following asset bubble: the unprecedented appreciation of home values that persisted until late 2007.

Current Fed Chairman Ben Bernanke, in the framework of his study of the 1930's deflation, may be similarly laying the groundwork now for the next bubble: a great inflation in the coming years. The Fed's theoretically infinite balance sheet stands at two trillion dollars as part of an effort to avoid the worst case scenario of another Great Depression. Bernanke apparently intends to contain future inflation. We shall see.

The credit and general economic crisis we experience now is related to the failure of the ownership society. Instead of sharply increasing the home ownership rate (also a goal of the Clinton administration), many homeowners found themselves "under water" and have been forced out of their homes due to a collapse of the great housing bubble. Some innocent homeowners were simply taken in by banks and mortgage companies who sold mortgages with indefensible terms of payment. Others were hoping for a free lunch.

Investors whose dream may have been to parlay their wealth by reselling homes at ever increasing prices may have been impaled as the bubble burst. Wall Street securitized residential mortgages, packaging riskier subprime loans with higher grade mortgages in order to gain the coveted triple A rating from the ratings agencies. And it worked, for a while, until the housing market did not grow to the sky, as predicted.

Many citizens, investors, institutions and countries across the globe were hobbled by losses as a result of this failure. I hope that the lesson will be learned that fear and greed in human nature cannot be underestimated and that democratic societies may be vulnerable to similar crises in the future. Building an ownership society still remains a lofty goal, at least in my opinion. It is my hope that we can move out of this crisis without turning away from the strengths of our economic system that have sustained America for so long.

How to Invest in Barack Obama's "Workers Paradise"

posted March 13, 2009

Hedge Funds: Four Reasons Why You Should Not Invest in Them

posted March 15, 2007

Hedge Funds, Deriviatives, Debt, China, and the Risk of Systemic Market Panic

posted February 28, 2007

Obama to U.S: Nobody should be Rich, and don't get Sick!

Tue, 21 Apr 2009 13:11:38 -0800

A member of the Obama team said recently on a major financial television network that the savings in the administration's budget are coming from changes in our healthcare system, and yes, from tax increases. I guess in this new world, federal spending cuts have morphed into tax increases!

Changing the nature of our healthcare system, then, is the Obama administration's real key to actual cuts in the federal budget. And that may mean deep cuts in physician and provider reimbursements, refusal of some physicians or providers to accept such reduced payments (unless mandated by law), and the potential for the rationing of care.

Rationing may be the cost of greater access for all Americans to adequate healthcare (though you won't hear Obama mentioning the "R" word). My advice: get a cold or a toothache - but whatever you do - do not get a serious illness! Waiting lists for life saving operations could occur here as they have in Canada's medical system. The demand on resources simply may be too much for our system to handle.

In his Presidential campaign, Obama pledged that if you own private insurance and wish to keep it, nothing would change, except that your premium would drop by approximately $2,500. Your relationship with your physicians would not change.

I do not know if that promise will be kept. Mandates for universal care placed on the system may make it impossible for the existing doctor/patient relationship to remain the same. An influx of new patients and lower reimbursements may strain the system. Will the Obama administration mandate how all patients should be treated if the goal is equal treatment for disease? And there is no guarantee whether private insurance will be maintained in the long run.

Personally, I have no sympathy for the health insurance companies. Many pay only when beaten over the head with the truth of a justified claim. In my opinion, if the companies can get away with avoiding reimbursement, they will probably try to do so. I have my own stories to tell about that.

Yesterday, I heard an Obama sound bite where the President stated that his administration has passed tax cuts. When the Bush tax cuts expire, Obama is apparently willing to pay more taxes himself. On tax day, it was announced that the Presidential family's 2008 income was $2.6 million, and they paid about a third of that in taxes. If I had that kind of income on a regular basis, I would not mind paying more too in a couple years when the Bush tax cuts expire!

Successful small business owners who are the backbone of job creation in this country may be squeezed by tax increases, perhaps not eliminated, but conceivably may not hire extra workers or expand their businesses. This would not help ease the current economic crisis we face.

It may presently be unfashionable (or even politically incorrect) for certain citizens to have a surplus of money. Many Americans are hurting, and naturally many turn to the government for help. But I do not think the government has all the solutions. Government should be cutting back, but it is not. It is expanding. It is spending.

There is a "glimmer of hope," to use President Obama's words, in some areas of the housing market, in spite of increasing foreclosures. Eventually the market will clear, but it will take time. The stock market may enter another long term bull market, but perhaps not for many years.

The best financial strategy in this environment may be: to refinance your mortgage if possible with a low fixed rate, to reduce debt if you have the means to do so, to maintain moderate exposure in the stock market, to consider owning physical gold, and to protect yourself against the potential of a falling dollar.

How to Invest in Barack Obama's "Workers Paradise"

Posted March 13, 2009

The Obama Factor: Why his "Change May Make You Economically Worse Off

Posted July 28, 2008

The Hillary Clinton Stock Market and Economy: Three Areas to Consider

Posted December 9, 2007

The End of the Dollar as We Know It?

Mon, 13 Apr 2009 16:26:48 -0800

Downloadable PDF version of this article

The currency markets, like most other financial markets, rise and fall partly based on international confidence in the economies, politics and monetary and taxation policies of the various nations whose paper money is traded through international exchanges.

The U.S. dollar enjoys a current status as a reserve currency.

The Wikipedia Free Encyclopedia defines a reserve currency as "a currency which is held in significant quantities by many governments and institutions as part of their foreign exchange reserves. It also tends to be the international pricing currency for products traded on a global market, such as oil, gold, etc."

The question in my mind regarding the future direction of the U.S. dollar is whether the unrestrained spending in Obama's current budget and higher taxes on successful small business owners (constraining job and economic growth) will be a double blow to the international worth of the dollar. Could the third blow be Fed Chairman Bernanke's self-proclaimed "monetary ease" that endangers the status of the dollar, depreciating its value through the tax of high inflation that could impoverish Obama's cherished middle class?

I think that the answer to these questions may be "yes." The dollar could fall back dramatically. Reckless fiscal policies combined with slower growth do not add up to a sound federal balance sheet, but this appears to be precisely where we are heading.

Should inflation ramp up in the next few years, the dollar's value in any country and account could be greatly damaged, causing further worldwide economic pain. Our citizens could find it too expensive to travel internationally (even more so than at present).

But should our leaders adopt a plan of responsible use of American taxpayer money, whereby the growth of federal spending is controlled and the authorities do not embark on huge "investments" in projects that our resources do not allow, then our dollar and our financial system may be rescued.

Longer term monetary policies are designed to be independent of shorter term political winds, and so we need to rely on the wisdom of those officials who determine monetary policy. However, economist Milton Friedman may have had it right when he suggested that the Fed should grow the money supply at a constant rate, whether we are in a boom or recession, in order to avoid the widest swings of the economy and implosions in our financial markets.

Prior to the international credit crisis and housing depression, there was already currency "portfolio adjustment" by wealth holders away from holding the U.S. dollar, with movement toward the euro and other strong currencies. China's central bank governor wrote in March 2009 that nations should in time replace the dollar as a reserve currency. This would no longer allow the U.S. to continue problematic economic policies (because it is a reserve unit) that may endanger other economies. In the midst of increased uncertainty regarding the future of the dollar, the gold market has regained stature as an investment asset class, about which I have written on this website for over two years.

We have to dig ourselves out of the hole we are in somehow. Just as our government now expects its citizens not to buy houses they cannot afford (and also that banks and mortgage brokers should not "game" the mortgage process for all it is worth), our leaders should respect the tradition of a free economy governed by the principles of fiscal restraint and sound money. After all, it is our money and our economy's future at stake.

An all-weather investment given a potential decline in the value of the dollar is widely known to be gold, and it would likely also benefit from increased inflation or even times of social unrest. The gold market might also prosper during the less likely scenario (in my view) of enduring deflation.

Inflation hedges in the stock market may also perform well. Established integrated oil companies are likely to maintain their advantage in providing energy while potentially providing some downside protection due to their combination of oil production and refining capacity.

On the currency front, the dollar index appears to be entering an area of long term resistance, and I believe it may decline. Specifically, the British pound may be finding footing at $1.40 at a sixteen-year long shelf of support on the monthly chart and may rally in the medium term, though its longer term value may be in question. The euro may soon find support on the weekly and monthly charts. And the Japanese yen may be retracing back to support at its breakout point from a ten-year sideways pattern on the monthly chart.

I have replaced my shares of the Barclays Bank IPath Exchange Traded Note USD/Japanese Yen Exchange Rate with the CurrencyShares Japanese Yen. I continue to hold a position in the Templeton Global Bond and the Franklin Templeton Hard Currency Funds (both beneficiaries of a falling dollar), as well as a diversified portfolio of equities and other mutual funds. I have held physical gold for years, though may look to unload some or all of it should a bubble appear in the gold market in the next year or two.

Why Our Economy Will Not Prosper Until We have Hard Money and How You Can Profit from It

posted January 13, 2009

Will the U.S. Suffer an Inflation or Deflation in 2009-2010, (or Both)?

posted February 3, 2009

Gold Market Strategy: An Upward Price Acceleration May be Imminent

posted March 23, 2009

The Future of the Dollar: Worth Less or Just Worthless?

posted April 6, 2009

The Future of the Dollar: Worth Less or Just Worthless?

Mon, 06 Apr 2009 19:57:54 -0800

The fate of a nation is often dictated by the fate of its currency, like it or not. Should there be a national and/or international loss of confidence in a country's paper currency due to the authorities' reckless fiscal and monetary policies or the inability of a country to meet its financial obligations, the currency may become almost worthless, as history has shown. In these cases, national economies have sometimes been destroyed.

Our currency's health is threatened by the potentially inflationary impact of Obama's huge $787 billion stimulus package, and the unsustainable growth of our national debt burden, which will increase by $5.0 trillion from 2010-2016.

Fed Chairman Bernanke seems to know the solution out of this problem: print so much money in an effort to revive the economy that we may depreciate our debts through a potential 1970's style double digit inflation, or worse. We may simply pay off our debts with dollars that are worth a great deal less. Bernanke's intention to scale back his monetary ease once the economy recovers may be easier said than done.

The massive stimulus package and tax policy of the Obama administration represent a huge gamble that we will be able to pay off our burgeoning national debt at a later time. The policy is described as a "down payment" on our country's future. There is also another planned $646 billion "down payment" on redoing our healthcare system. Well, it seems more like the full payment to me. Young Obama think tank intellectuals back this federal buy now pay later policy as justified, at a time when discretionary spending is slated to grow at a staggering 11% rate. The 2009 budget deficit will be $1.75 trillion in 2009 alone.

It appears to me that this course is unsustainable, and that the only way out is a debasement of the currency. Gold may in the future regain its position as the foundation of our currency as a solution to the debt problem (which admittedly has problems of its own). Gold may until then do rather well as an inflation hedge and as a medium to maintain one's international purchasing power. Should the dollar decline in this environment as I expect it may, gold's position as a growing asset could be enhanced.

Can we really afford to max out our country's credit cards in the current manner? I do not think so. In my opinion, the key to keeping the budget deficit in check is by lowering the growth of discretionary spending and keeping taxes moderate enough as to encourage businesses to stimulate further tax revenue through economic growth. This approach may also be compatible with moderate financial sector regulation.

What is at risk here cannot be understated. We are indeed at a crossroads where going down the wrong way, toward ever increasing levels of federal debt and multi-trillion dollar deficits, may be resolved only by making our dollars domestically and internationally worth less (to the point of being almost worthless). The administration and the Federal Reserve are risking our dollar's status as a viable reserve currency and as we all know, jeopardizing the standard of living for millions of Americans.

Related posts:

Call to the Bernanke Federal Reserve: Round Up the Debt!
posted May 14, 2008

Why Our Economy Will Not Prosper Until We Have Hard Money and How You Can Profit from It
posted January 13, 2009

Gold Price Shines and Takes a Breather: More Upside to Come?
posted March 3, 2009

Gold Market Strategy: An Upward Price Acceleration May be Imminent

Mon, 23 Mar 2009 10:57:09 -0800

I wrote in my recent article on the outlook for gold: Why Gold May Begin the Last Leg of Its Bull Market Sooner Than You Think, posted February 23, 2009, that I was anticipating a possible acceleration phase or blow-off top in the gold market price (now at $951.10 per ounce).

Gold easily surpassed its 1979 high of $850 in 2007, after a long bear market for the precious metal. I see a possible sharp upward price movement in the next year or two as being similar in form to the blow-off top in gold in 1978-1980. At that time, the gold market price moved from $200 to $850 per ounce. If we look at that particular dynamic price increase more closely, we see that the move from $425 to $850 occurred in the short time span of two months in the first quarter of 1979.

If we were to apply that picture from the 1970's bull market in gold to where we are now, gold may more than double from its current price of $951 or may even trade higher.

The economic and political events that might accompany such a dynamic price increase are varied. Rapidly increasing inflation in the next year or two as a result of Fed Chairman Bernanke's extreme "monetary ease" could ignite a surge in the gold price.

A loss of confidence in the Obama economic policies from our trading partners and in the relative stability of the dollar as a result of the rapid increase of U.S. government indebtedness could result in a run on the dollar, economic poverty and a tide of increasing gold prices. A situation could emerge as even U.S. consumers may not wish to hold U.S. dollars, and may opt instead to hold gold or more stable foreign currencies.

This is a very negative picture, and one that I present for the purpose of giving fundamental weight to a technical price outlook for the gold market. These events may or may not happen, or other destabilizing events may take a different form. However, it appears to me that there may be a strong likelihood that our country may experience greater inflation down the road along with a falling U.S. dollar - and this is good for gold prices.

Will This Stock Market Go Lower?

Tue, 17 Mar 2009 08:20:16 -0800

A long term bull or bear market in equities may last as long as 16 years, as was the case in the bear market from 1966-1982. That long term bear market included a deep 48% retrenchment in the Dow Average in 1973-1974. The market rose powerfully out of that 1974 bear market bottom, and stocks then traded in a range until the new dawn of the long term bull market beginning in August 1982 as a free market Reagan administration took over the reins of power.

A long term bear market in stocks such as the one referenced above may be punctuated by shorter term bull markets. Our market recently experienced a bull trend that ran from 2002-2007, when it rose to over 14,000. But the primary bear took over at that point and the Dow Average has collapsed to 7,216. The market may be finding a bottom as the extent of the recent decline of 50% is similar to the depth of the 1974 low.

However, the 1929-1932 example of an 85% decline in stocks could cast a shadow on hopes for a market bottom today. But today's massive inflationary monetary and fiscal policies underway to get us out of the mess in which we find ourselves may halt the market's decline short of the 85% decline achieved during the Great Depression.

That said, we may now only be in the ninth year of a long term bear market in stocks that commenced in March of 2000 and appears to be still running over the bull herd today. Should we find a market bottom in 2009 and embark on a significant stock rally, we could then trade in a range for several years before the next long term bull market may appear.

I believe that we find ourselves today under the Obama administration in a political environment of over-regulation and high government spending with almost no restraint, and an economy marked by high inflation, buoyant gold prices, and possible future oil shocks. This could be similar to the economic environment we had during the Jimmy Carter years as experienced in the late 1970's, an era of double digit inflation and interest rates, low stock levels and a bull market in gold.

Please see the following article posted on January 18, 2008: The Stock Market and Economy: A Return to the 1970's in Form, and How Obama May Bomb the Stock Market and Economy in 2009-2010, posted on June 19, 2008.

How to Invest in Barack Obama's "Workers Paradise"

Fri, 13 Mar 2009 12:29:03 -0800

Downloadable PDF version of this article

The Obama administration may be doing everything in its power to destroy private industry jobs faster than the government can "create" them. The U.S. government itself may be the best growth industry in the U.S. as the government directs taxpayer money into the industries and pet projects of its choice.

Normally in capitalist economies, recessions clean out businesses and consumers whose risk-taking did not succeed or who accumulated excessive debt and cannot pay it back. A downturn will then lay down the foundation for healthy growth in the future by rewarding both older and new business success stories and punishing businesses that did not adjust to a dynamically changing economy and therefore failed. This is sometimes a painful process.

The Obama administration is attempting to prevent the business cycle from completing its normal course through successive bailouts of the banking and financial services sector and by buttressing major failing companies such as the autos. Business failures are being rewarded with billions of taxpayer dollars while business successes are being punished through Obama's "spread the wealth" plan.

The government has effectively frozen our economy where it is now, trying to stop the process of "creative destruction" in which the new supplants the old (and about which Joseph Schumpeter wrote so well). The only "change" we see happening is being dictated by our government as it attempts to spend its way out of the hole we are in.

The Obama administration and Federal Reserve Chairman Bernanke are literally betting the republic's financial survival on the outcome of a massive spending plan and the Fed's potentially inflationary "monetary ease." Obama's populist wealth transfer policies from "rich people" to benefit Main Street do help many mortgage holders and struggling families.

But the Obama administration may be nailing the coffin shut on certain industries such as banking as it mandates changes in mortgage contracts which will squeeze the banks further. Many banks are on life support while receiving taxpayer dollars. They are being told to issue loans to businesses and consumers. Should life support fail or be cut off, the banks may not survive and their employees may end up unemployed, though somewhat later than if the banks had been allowed to fail in the first place. Meanwhile, tens of billions of taxpayer dollars will have been wasted. See my article on Obama written before the election at How Obama May Bomb the Stock Market and Economy in 2009-2010.

For further information regarding the effect of Obama's policies on the stock market, see Why the Stock Market May Have Collapsed Months Before Barack Obama was Elected President.

There is also the Law of Unintended Consequences, as big government's intrusion into the private sector has unintended and potentially harmful consequences to the economy. For example, Bill Clinton's luxury tax on yachts almost destroyed the boat building industry in the Carolinas as the buyers of higher priced yachts refrained from purchasing because of the excess taxation. This taxation was probably more harmful than good for economic growth.

Obama's comment that businesses that receive TARP money should think carefully before sending their employees on "junkets" to conventions in Las Vegas, has resulted in many convention reservation cancellations. Restrictions on executive travel destinations and behavior may cause a significant unemployment ripple effect that will harm the hotels, restaurants, cab drivers, theaters, etc. I do think that TARP money should not be wasted on business/gambling junkets, but the reduction in business travel has consequences for the economy.

The pharmaceutical companies are other obvious targets of the Obama administration, as lifesaving drugs may be placed under price controls. Such price controls, if enacted, may result in shortages of many medicines as it may not be as profitable to produce the drugs. It is possible that the drug companies may attempt to cut costs by reducing sales representative and research scientist staffing.

Most of the new drugs developed globally come from U.S. companies. If price controls are imposed, we may see in several years a significant reduction in the count of new drugs being created. Bureaucratic delays of drug approvals may further limit the number of new medicines available to the public. Pharmaceutical companies may end up needing to modify their businesses to suit the heavy hand of government, not the free market.

The U.S. is now effectively subsidizing the drug prices of other Western economies that have socialized medicine. In a free market, the high prices that are being charged in the U.S. might fall and prices in countries with socialized medicine might be adjusted upward. This would end the subsidy through the free market and at the same time save crucial drug companies from being forced to cut back their research and development expenditures.

What does this all mean for the investor? I only hold one bank, and have sold my two pharmaceutical holdings, all which I have held at least fifteen years. Future inflation beneficiaries such as physical gold, major integrated oil companies and major oil service firms may pick up steam should inflation go into the high single or into the double digit range, as I believe it may. See my article: Will the U.S. Suffer an Inflation or Deflation in 2009-2010, (or Both)?.

The dollar may resume its decline against certain major currencies should market players take into account the United States' uncontrollable budget deficits and a reduction of our living standards (because of high consumer and Federal debt levels). I am trying to keep enough cash in money market or bond funds, both foreign currency and U.S. dollar denominated, to cover my mortgage debt.

Why Some Investment Managers Fail to Preserve their Clients' Wealth

Tue, 10 Mar 2009 10:48:54 -0800

Many advisors on Wall Street, including many mutual fund managers, many hedge fund managers and many bank trust departments, fail at their primary task: preserving and/or growing their clients' capital.

Such managers may suffer from the" institutional imperative," or "group think." This is where the players in the market may be blinded by the raw emotion (bullish or bearish) of a given market's movement or trend and act accordingly with the will of the herd.

For example, when the stock market rises strongly, it may create excitement among the players which may entice money managers to be caught up in the buying panic. They may lose sight of the bigger picture or just may not execute their original investing plan effectively. Group think hinders independent thinking and creativity that is so crucial to achieving success on Wall Street.

Please see my article: Stock Market Investing and the Power of Contrary Opinion, which posits the theory that better investment results may be obtained by investing in a manner contrary to the crowd.

Here are examples of group think:

The herd of investors may follow the latest trends or investment fads. An example of this was in the great technology bubble of the late 1990's, which like many fads, ended badly. Many investment managers got caught up in the euphoria of ever increasing technology stock prices and may not have sold before the ensuing bear market that began in 2000 decimated many technology issues.

The current credit crisis may be the result of a huge real estate bubble. The bear markets in real estate (when many consumers, mortgage brokers, banks, and investment managers believed in or enabled the fairy tale of ever increasing housing prices) and in the stock market has wiped out consumer and corporate wealth on a wide scale.

Many managers before the 2008 Crash in stocks were enamored by derivatives instruments, the hedge fund fad, and the buoyant housing market (and the securitization of loans), all which have turned out quite badly.

Please see my article, Hedge Funds: Four Reasons Why You Should Not Invest in Them. The unwinding of hugely leveraged hedge fund positions continues to pressure the stock market.

The causes of the housing and credit breakdown may be related to bank and mortgage company officers freely granting outsized mortgages to consumers that had no hope to repay, with all having a mindset that nothing could stand in the way of the housing locomotive. Most of the participants and many investment managers subscribed to the dream of the Ownership Society, a dream that was achievable in moderation but frayed at the edges when houses were literally being given away to all takers who could sign a form.

Mass defaults in subprime loans cascaded into a fully fledged credit crunch as housing values topped out and turned downward. Lenders only lend to the most creditworthy customers. The economy has ground to a halt, housing prices has continued to fall, the credit and stock markets have been paralyzed, and unemployment has increased.

So it was all a dream. Money managers who followed the hedge fund fad found themselves saddled by their funds' leverage which was working against them. Bank trust fund departments, who often work by committee or have "approved stock purchase" lists," may not have been nimble enough to avoid the Crash of the market. Even good bear-market resistant mutual fund managers may have been caught off guard except for a very few in this "take no prisoners" market.

In number three of the FAQ's of my website, I posit a simple way of finding the better mutual fund managers by using the Forbes Magazine grading of the mutual fund universe. My book adds that it may be better to select managers with good track records in difficult markets, an idea which may have served the average investor well in this bear market.

Gold Price Shines and Takes a Breather: Is There More Upside to Come?

Tue, 03 Mar 2009 18:49:13 -0800

The gold price has recently broken out of a flag formation on the upside on the weekly gold chart in a price move from $900 and trading as high as $1007.70 on February 20, 2009. The gold market is now pulling back down sharply to as low as $905.70 intraday on March 3, 2009. This pullback to the breakout point appears to be normal, and the gold market could resume its powerful uptrend once this retreat is over.

Yet on the fundamental side, there are opposing arguments for the gold market outlook. The current chaotic economic picture is positive for gold (including the potential for much greater future inflation). Investors and the public may find increasing reasons to invest in the metal given the worldwide printing of money to combat the deepest recession in over 25 years.

But famed investor Jim Rogers has pointed out recently on financial television that should the IMF, which has been considering gold sales, go ahead with that plan, the gold price may be under strong downward pressure. Yet, Rogers continues to hold gold.

Rogers also says that there may be future supply constraints in commodities such as oil and even food, as current investments in production are now being curtailed or made impossible due to the freeze on credit. This could lead higher inflation and would potentially benefit gold as an inflation hedge.

How does this sort itself out? Should the bullish weekly chart flag formation be violated on the downside as a result of gold sales or some other reason, it could present a potentially good buying opportunity at lower prices. Yet, gold would still need time to recover from such a decline before it potentially finishes the late stages of its bull market. Please see my article: "Why Gold May Soar to $3,700 Sooner Than You Think."

As I have been discussing for over two years on this website, the verdict for gold may be still "bull market."

Why the Stock Market May have Collapsed Months before Barack Obama was Elected President

Sat, 28 Feb 2009 10:59:18 -0800

Background: I remember in February 2007, the Shanghai market cracked, and ours followed sharply downward the next day. However, both our markets and the Shanghai Exchange snapped back shortly thereafter as quickly as they had fallen.

This was a wakeup call for me, and the first time that I questioned the American bull market in stocks that began in 2003. I wrote about this in my article, Are Stocks Still Worthwhile Investments? A Reconsideration: The Odds of a Panic, posted in April 2007, where I wrote that there may have been an "unsupported speculative fever" underlying the stock market.

Shortly before I wrote the article to which I referred in the link above, I selected from my investment book collection my copy of John Kenneth Galbraith's The Crash 1929, referring to the Stock Market decline of that year. I recall Galbraith's vivid descriptions of the mindset of the stock market players prior to the 1929 Crash - how the speculative fever took hold of the public. Galbraith reported that the stock market cracked several times before The Crash, but quickly recovered and resumed its steep ascent until finally that fateful day in October 1929, when the Crash of the stock market marked the beginning of the Great Depression.

In The Great Crash of 1929, economist and thinker John Kenneth Galbraith brought the time before the Crash of 1929 and its aftermath into the mind and emotions of the reader with elegant prose and style. A must read for modern investors to comprehend the nature of the stock market Crash we are now experiencing.

Argument: The stock market thinks about six months in advance. If it likes what it sees, then it may go up. If not, it may decline, or enter a bear market. I argue that the stock market looked ahead six months prior to the 2008 Presidential election at a possible outcome, and did not like what it saw. It may have seen not only an Obama victory (with potential left wing policies being enacted), but a dramatic worsening of the credit crisis.

Text: As we know, the stock market began its decent of 6000 points in June 2008, several months before the Presidential election. I recall visiting the Barack Obama website before the election, and there was a long list of programs proposed, mostly all costing exactly ten billion dollars each. It just seemed strange to me that the campaign would affix the same price tag to most programs on the list, even though the programs may not have been related. It just seemed to be a potential red flag to me. Odd.

Another potential red flag on Obama's site was a proposal for the government to fill out our tax returns for us, based on the information submitted by the banks, brokerage firms, credit unions, etc. to the IRS. We would have the option of accepting the government's calculations or not accepting them. If we did not accept it, we could then either hire a tax preparer or file the return ourselves. The reasoning given for the proposal was that if the government did our taxes, we would not have to spend the money on a tax preparer. This just seemed to me to be a violation of my rights. Would the IRS be filling out our returns, or what?

The other item that was a potential red flag on Obama's site was that the proposed programs seemed to cover all facets of our lives. There was a program or proposal for everything, from a person's birth to old age. Is not that cradle to grave coverage? A little bit of Big Brother? I do not know. We are going through very hard times now, and people do need help. I suppose in a way it's a good thing. My idea of old age coverage is long term care insurance. I just hope my insurance company does not go under because it has insured mortgages all over the world.
I think what I am trying to say is if we may be headed to democratic socialism and a heavily anti-business platform, it may not be good for the stock market, and the stock market may have been anticipating an Obama victory when it collapsed. See my article, How Obama May Bomb the Stock Market and Economy in 2009-2010, which contains a link to the Iowa Electronic Market's (a type of futures market), betting on the Presidential Election, showing an Obama lead since late May 2008. Remember, the market thinks six months in advance.