Monday, March 29, 2010

The Fannie May and Freddie Mac debacle

No man is happy without a delusion of some kind. Delusions are as necessary to our happiness as realities.
Christian Nevell Bovee, 1820-1904, American Author, Lawyer

Meanwhile, taxpayers have pumped more than $125 billion into the failed firms -- and on the hook for many more after the administration promised an unlimited source of funds just before Christmas to backstop their growing losses. "We will do everything necessary to ensure these institutions have the capital they need to meet their commitments," Geithner said in response to tough questions from Rep. Scott Garrett, a New Jersey Republican. Underscoring the need for change, Geithner acknowledged that taxpayers are likely to face "very substantial" losses on the government's takeover of Fannie and Freddie.

Republicans on the panel want to dismantle Fannie and Freddie within five years, arguing that the government-backed firms cost taxpayers too much with little to show for it -- hundreds of billions in taxpayer losses for a housing finance system rife with moral hazard issues and a crowding out of private companies from the market. Full Story

When Geithner states that they will do everything to make sure these institutions have the capital they need to function, he is basically stating that they are willing to use tax payer’s money to fund two worthless entities, instead of dismantling them. Trying to keep these agencies floating is akin to pouring money into a bottomless pit.

One of the old lines was that these two agencies helped make housing affordable by providing an avenue for individuals who would not normally qualify for a mortgage. The following quote was extracted their site.

Fannie Mae works to increase the supply of affordable for-sale and for-rent housing across America by creating customized financing solutions with our housing partners. These financing solutions help ensure stable, livable neighborhoods. Through multiple community development investment funds, Fannie Mae works to tear down barriers, lower costs and increase opportunities for homeownership and affordable rental housing for all Americans. Full Story

They have been a failure in every sense of the word; in trying to provide affordable housing they indirectly provided banks with the incentive to sell as many mortgages as possible. As soon as the deal was closed the banks could get these mortgages of their books by dumping them onto these two agencies.

Some background info on these two companies

They were created by the Federal National Mortgage Association in the 1930’s to help speed up the home ownership process by buying mortgagees from banks. Banks would normally sell a mortgage and then put it on their books, this means that each time they did so, a certain amount of capital was tied up and this limited the number of mortgages they could issue. Now they could simply issue a mortgage and sell it to Freddie or Fannie and as a result banks could issue almost as many mortgages as they could sell.

Although they are private companies, they are government sponsored enterprises established by federal law. As GSE’s they received special privileges, the main one being that if they were threatened with failure, the federal government would come to their rescue. This gave them the best of both worlds; profits are privatised but losses are socialized. This guarantee basically encourages immoral and unconscionable behaviour because there is no downside; the downside becomes the government’s problem, which in turn becomes the tax payer’s problem.

Now let’s examine if they really helped the public

Freddie Mac lost 50 billion last year but has now come begging to the government for another 31.8 billion and this comes on top of the 13.8 billion Freddie asked for last year. The government has pledged a massive 200 billion line of credit to support this disaster and based on all the talk so far, they would probably offer even more if Freddie ever needed it.

If we weigh the cost to the taxpayer and the so called savings these two mortgage giants provided, one finds that they failed miserably and have really provided no benefit at all. How can this be? The so called benefits from offering lower mortgage rates has been offset by the cost of all the money taxpayers have poured into these two companies. . They had access to money at a lower rate than private companies and could in turn pass these savings to the consumer; lenders provided them with lower rates because their survival was guaranteed by the Federal government. Based on the amount of money they have already asked for and the future amounts they will need to continue functioning, it is estimated that by the end of the year they will become net losers. In other words, they would have moved from providing some value to providing none at all.

Lawrence J. White an economist at the New York University (Stern School of business) states that the GSE’s could borrow money 35-40 basis points lower than the private sector. Thus if the standard rate was 6%, they paid only 5.60-5.65%.

At the end of 2008 these two companies had 31 million mortgages on their books, which were worth in excess of 5 trillion (actual figures were roughly in the 5.4-5.6 trillion ranges). Thus borrowers would have saved roughly 10 billion in 2008. According to Daniel Gross over the years, they supposedly produced savings of $100 billion.

If we compare this potential $100 billion in savings they have provided against the $300 billion plus in financial support the Government has pledged to both these agencies, the conclusion is clear; these two companies have provided no benefit at all. In fact, one has to wonder why they continue to exist as they have now become a monumental liability. It is true they have not used up all the money the government has pledged to them (at least not yet) but at the rate, they are burning this money, it’s only a matter of time before they go through those funds before they start begging for more. Thus would it not be better to dismantle these two monstrosities and cut and end the haemorrhaging.

If one were to state that these guys had a large role to play in the financial crisis that hit this nation, one would not be too far off the mark. After all they did provide banks with an incentive by virtually buying any crap that the banks were willing to throw at them.

The government is hell bent on pouring good money into completely useless projects, but when it comes to helping individuals; they find ways to make painful cuts. Point and case, not approving a $250 checks for senior citizens. To make matters worse they create money out of thin air to pay for these black hole projects, thereby further devaluing our currency and indirectly imposing a silent tax on the population. The only way investors can protect themselves under such conditions are to make sure that one puts a portion of one’s money into hard assets; the simplest way to do this would be to purchase some Gold, Silver or Palladium bullion.

The people of the world having once been deceived, suspect deceit in truth itself.
Hitopadesa, 600?-1100? AD, Sanskrit Fable From Panchatantra


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Thursday, March 25, 2010

The Competitive currency devaluation era gains momentum

You can fool all the people all the time if the advertising budget is big enough.
Ed Rollins

Portugal has just had its credit rating cut and both Greece and Spain are now begging the EU to set up a bailout fund to help the beggar nations (PIIGS) who are unwilling to curb their spending habits. In our previous article, we made the following comments.

Indirectly they have been begging for assistance from the very start. This aid package will trigger other beggar members of the PIIGS group to eventually join the handout club. Next in line is probably Spain. If the top members of the EU wanted to send a strong message to the weak members they should have stuck hard and fast to their previous claims that no aid would be forthcoming. Euro Woes, Part II: Have We Entered the Devalue or Die Era?

Now that Portugal has its credit rating lowered, Spain has started making noise about setting up a bailout fund. Not too long ago they stated that all was well, and that they should not be compared with Greece. Ironical is it not that they have now joined up with Greece in demanding a fund be set up to help nations that are having problems financing their debt.

French and Germany appear to have reached some agreement (the key word being appear) as indicated by the story below

The safety net - not yet agreed by the whole eurozone - would total about 22bn euros (£20bn). It would apply only if market lending to Greece dried up. Eurozone countries would grant co-ordinated bilateral loans, and there would be "substantial" IMF loans. The "majority" funding would be European. EU leaders are poised to discuss the plan at a two-day summit in Brussels. Full Story

We could go on about the potential ramifications of the above idea but there is something that is more interesting that we would like to speak off.

Germany and France knew that they would eventually come to the table and approve some sort of package even though they made a lot of noise about doing nothing in the beginning. No one has bothered to ask why. The reason is by playing this cat and mouse game, they have allowed the Euro to lose a significant portion of its value; in effect, they indirectly devalued their currency without actually officially having to do so. Each time they put out a story to calm the markets they leave room to change their position. The story above and the just released story below are perfect examples of such ploys in action. While France and Germany have agreed to set up a fund, they leave extra wiggle room by stating that this matter would still need approval from the whole euro zone.

The market's advance fizzled after European Central Bank's president Jean-Claude Trichet told French television that Europe must take responsibility for its financial problems. That raised concerns about when a rescue for Greece might come. Officials from European nations were meeting late Thursday to discuss their economic problems.

Investors have been concerned for months that problems in Greece and other debt-strapped countries in Europe would spread and spoil a global economic rebound.

"Any time we see comments about it it seems to spook the market," said Adam Gould, senior portfolio manager at Direxion Funds in New York, referring to Greece's financial problems. He said traders still expect Greece will get a bailout but the questions about how unnerved investors. "It's more the uncertainty." Full story=

A single nation can easily devalue its currency but in the Euro zone a single nation does not have this power. The large members can, however, pretend like they are not willing to help the smaller weaker members and thereby create a mini confidence crisis; the net result the Euro loses some of its value.

The US is deflating its currency by printing money at a stupendous rate, China is devaluing its currency by pegging it to the weak Dollar and countries like Vietnam simply openly devalue their currency in order to maintain a competitive edge. Expect this trend to pick up steam; it’s now going to be a race to the bottom of the pit, and it will only end with a full blow currency crisis. Investors should make sure they have a position in precious metals. Don’t think of it as investment, think of it as insurance just in case the house burns down. Use strong pull backs to add to your positions.

He who doesn't have legs cannot teach one how to walk

If you are interested in a trading service with a high win ratio (currency futures, commodity plays, etc) than consider giving our service a try. Our 5 average win ratio is in excess of 75% and our 12 month win ratio has jumped to 84%. The Winning Zone.

Tuesday, March 23, 2010

A small but Strategic victory for Google

After issuing many threats that it would pull out of China Google was left with little wiggle room, and it looked like they had backed themselves into a tight corner. It was a given that the Chinese government would not cave into their demands. Doing so would have made them look weak not only among their people but also to the rest of the world. Thus Google’s latest move to redirect traffic to Google hung Kong is a very smart move for in one shot it exposed just how much content the Chinese government insists on censoring.   Instead of getting an error message or simply producing no search results, users are greeted with a message that states Page is unavailable. This move now shifts the burden of censoring content from Google shoulders to that of the Chinese Government via its “great firewall” and at the same time is a small victory for Google as it has the Chinese government on defence now as indicated by the following statement.

Google has "violated its written promise" and is "totally wrong" by stopping censoring its Chinese language searching

results and blaming China for alleged hacker attacks, a government official said early Tuesday morning.Full Story

Google’s current strategy to redirect its China site to its Hong Kong site Google has virtually given up nothing and achieved all the following benefits in one shot.

Made the Chinese Government look foolish and directly exposed the level of their censorship. This together with Google’s “evil meter” (this metre shows what the Chinese government is blocking in real time) has now enabled the whole world to see the extent of china’s censorship.

It has not lost any of its Chinese Traffic, and it managed to catch the Chinese government off guard with its sudden announcements as evidenced the host of silly responses from government officials.

It has stopped censoring search results, transferring this burden to the Chinese government instead.

And finally it has the option to redirect traffic back to China. Cn if a new agreement with the Chinese government can be reached.

In conclusion, Google’s victory while small is somewhat significant. It has been able to stick to its guns without giving up its stake in the world’s fastest growing internet market.

Monday, March 22, 2010

Palladium; the Stealth bull Market.

The steeper the mountain the harder the climb the better the view from the finishing line

Palladium was the underdog of the precious metals sector for a long time, because for the most part it hardly received any attention. In the last few months this all changed and with the introduction of the Palladium ETF (PALL), Palladium has finally emerged from the shadows to the spotlight. Now the average Joe has a way to jump in and out of Palladium without having to actually purchase the metal. In reality owing the physical is far better than buying the ETF, but that is a topic for another day. When the Gold ETF was introduced it helped drive the price of gold bullion because it provided an easy means to jump in and out of Gold and so investors piled into it; from nowhere in a few years GLD has grown into a juggernaut. GLD is now the 6th largest holder of gold bullion in the world. In the same manner demand for Palladium is going to rocket upwards with the introduction of the Palladium ETF (PALL). PALL hit the markets on the 8th of January and it has already had an impact on Palladium’s price. Note that Palladium is the only precious metal that has actually put in a new 52 week highs in the face of a stronger dollar

While demand dropped a bit in 2009 due to the economic crisis, this drop did not seem to prevent this metal from surging to a series of new 52 week highs. In fact, in the past 15 months, palladium is the best performing precious metal.

China’s appetite for Palladium is growing at a voracious rate. A report by David Jollie published in May 2009 by Johnson Matthey states that demand in Chian surged from 500,000 oz to 650,000 ounces, in 2008. Demand from the Jewellery sector was rather strong in the first three quarters of the year.

In 2008 there was a surplus of 460,000 ounces but net demand still climbed by 15,000 oz, to 6.85 million oz, although the world as a whole was going through one of the worst economic crises in the last 60 years.

The palladium market was in surplus by 460,000 oz in 2008 and yet net palladium demand climbed by 15,000 oz, to 6.85-million ounces, despite the economic slowdown.

Production, on the other hand continues to fall mainly owing to lower production by the two major players in this sector, Russian and South Africa. Production fell to 7.31 million ounces in 2008, a fall of almost 15%. Investment demand for Palladium climbed to 400,000 ounces in 2008, a rise of over 50%. ETF’s were the major players purchasing 370,000 ounces and demand via coins and small bars jumped to 30,000 ounces.

As of Feb 2010, the Palladium ETF PALL has 430,000 ounces of Palladium. This is a huge amount of Palladium; to put this in perspective consider the fact that it took the London ETF over 2 years to accumulate the same amount.

As stated below the demand for precious metals (Palladium, Platinum, Gold and Silver) is increasing at a voracious pace and the story below quite clearly illustrates this point.

Investments in precious metals such as gold, silver, platinum and palladium are in feverish pitch across China. No wonder, then, that the Chinese consumption of precious metals is dramatically going up, and up. China consumed 395.6 tonnes of gold in 2008 for jewelry and investment, reports the World Gold Council, or around 14% of global demand, up from 327.8 tonnes in 2007. In 2009, gold jewelry and investment demand in China is expected to reach 432 tonnes, compared with 422 tonnes from India.

On the derivative exchanges, China's Gold Futures trading volume hit 1.49 trillion Yuan in 2008. This is likely to double in 2009. Ditto platinum and palladium. Physical Chinese demand for platinum jewelry was at around 0.76 million ounces last year, accounting for 68% of the global total of 1.12 million ounces. The latest forecast sees that hitting 1.5 million oz in 2009, which even if it is a gross rather than net (of recycling) remains impressive. The Chinese jewelry demand for palladium increased from 15.5 tonnes to 20.2 tonnes, making palladium another hot commodity in China. Full Story

China usurped India as the World’s largest consumer of Gold this year and will probably end up being the largest consumer of all the remaining 3 precious metals in the years to come.

Now let’s take a look at the Technical picture.


Palladium took a massive beating in 2008 and surrendered all its prior gains in a matter of months. However, this proved to be a buying opportunity of a lifetime, and we continuously pounded the table from late to 2008 to early 2009 and even went so far as to inform our subscribers’ that it had fallen into the screaming buy category. The term screaming buy is rarely used, and we only use it when we feel that we have spotted an investment that is extremely undervalued with incredible upside potential. From low to high Palladium surged well over 120% in a period of roughly 15 months; an incredible rate of return to say the least.

It broke through the 1st resistance point at 375 with relative ease and is now attempting to break past an even stronger zone of resistance. The $465-$475 ranges make up a zone of very strong resistance, and most likely it will take several attempts before palladium manages to break past this zone; once it does though it should be clear sailing to the 550-600 ranges.


Palladium is now at a very important junction; it has just broken through the long term down trend line and is attempting to break out of a 10 year channel formation. Palladium will now need to trade past the 465-475 ranges for 12 days in a row. If it can achieve this, it will set up the base for a rally that could take it all the way to the 800-890 ranges. If we had to put a time frame on this, we would say that once it trades past the 456-475 ranges for the suggested period of time, it could hit these targets within 12-18 months.

The real bull market, however, will only begin when palladium trades past 1100. Taking an even long term view; a close above 1100 on a monthly basis and the ability to trade past this level for 15 consecutive days in a row, should lead to a test of the 1500-1700 ranges.


On our proprietary timing indicators Palladium has an open Buy signal on the daily, weekly and monthly time lines, so the long term outlook for this metal is rather bright. It is the only precious metal that went on to put in a new 52 week high in the face of a stronger dollar. More importantly it is also the only precious metal that did not issue a weekly sell signal at all during the dollar’s surge upwards; it momentarily issued a daily sell which has long since been neutralized.

The long term and the very long term outlook for Palladium is extremely bright. In the short to intermediate terms Palladium is due for some profit taking as it has mounted a tremendous rally in the past 15 months. Prudent investors would be wise to use any strong pull backs to add to or open up new positions in this metal. Investors will one day look back and view the current price as a bargain, do not make the mistake of looking out the window and wishing you had bought it. Now that you have the chance make sure you at least have a small position in it and use pullbacks to add to this position. While purchasing PALL might be one way to take a stake in Palladium, our preferred method of choice is Palladium bullion. Our bullion dealer of choice is Larry Labrode, our subscribers have dealt with him for years and his service and knowledge are simply outstanding to say the least. You can make contact with him at

One who has imagination without learning has wings without feet.
Joseph Joubert, 1754-1824, French Moralist

Tuesday, March 16, 2010

The Devalue or Die era is picking up steam

It is a wise person that adapts themselves to all contingencies; it's the fool who always struggles like a swimmer against the current.
Source Unknown

The US and criticizes China over is reluctance to let the Yuan appreciate and indirectly blame some of its woes (increasing budget deficits) on China keeping the Yuan pegged to the dollar. Let’s stop for a moment. Is this not the pot calling the kettle black syndrome? The US is debasing its currency and a mind boggling rate, printing new dollars to the tune of 1 plus trillion a year, and yet we have the nerve to call on China to revalue its Yuan.

If the US wanted to put an end to this nonsense it would simply follow a course that would ensure the dollar becomes stronger, this in turn would drive the value of the Yuan up as it is pegged to the dollar. Clearly, the US does not favour stronger dollar policy for though it mouths this, its actions speak otherwise. The bandits in congress want to print all the money in the world, and then they want other nations to let their currencies appreciate. China is too smart to fall for this game and the US is no longer the big bad wolf that can huff and puff and blow all the straw houses down. Now many of the houses are built with brick and steel and so no matter how hard this big bad wolf blows the Chinese house is not going to fall down.

One must remember that the one that controls the strings to the purse is the one that is in command and at this point China with its huge holding of US treasuries appears to be in charge. Thus the US can make a lot of noise out there but China will not listen because they know that all they have to do is threaten to unload their treasury holdings (they do not even have to really sell them) and it could have a severe impact on our markets. The story below clearly indicates that China is not going to be bullied into allowing its currency to appreciate against the dollar.

A Commerce Ministry spokesman repeated Chinese complaints that Washington was acting unreasonably by expecting other countries to raise their value of their currencies in order to boost U.S. exports. The United States and other trading partners complain Beijing keeps the yuan undervalued and are pressing for it to rise. "Politicizing the exchange rate issue is not helpful to coordination among all parties in the course of fighting the global financial crisis," spokesman Yao Jian said at a news briefing.

A group of 130 U.S. lawmakers wrote to President Barack Obama on Monday demanding that he take action, adding to pressure ahead of an April report in which the U.S. Treasury has the option of declaring Beijing a currency manipulator. That would set the stage for a complaint to the World Trade Organization and possible sanctions.

On Sunday, Premier Wen Jiabao denied the yuan was undervalued and said foreign pressure was unhelpful. He said Beijing plans to reform its exchange rate system but the currency will be kept at a "stable and balanced" level.

Yao rejected suggestions the yuan's exchange rate was to blame for the Chinese trade surplus or the U.S. trade deficit with China. Critics say the yuan is undervalued by up to 40 percent, giving China's exporters an unfair price advantage. Full Story=

The Chinese have adopted the Mantra, if you cannot beat them, you might as well join them, and they achieved this by pegging the Yuan to the Dollar.

Every nation is using every means at their disposal to devalue their currencies; look at the pound, not to too long ago it took 2 dollars to buy one British pound, today it takes only a 1.50.

Vietnam decided to devalue its currency twice in a matter of 3 months and 3 times in the last two years, clearly illustrating that they are not going to be left holding the back.

Vietnam's central bank declared Wednesday that it would devalue its currency-the dong by 5.44 per cent, effective Thursday. The central bank will also increase its key interest rate from 7 per cent to 8 per cent, effective on December 1. Speaking on the topic, economist Tai Hui said, "We have seen a significant amount of devaluation pressure on the dong in recent weeks. The rate hike is there to support the dong."

Trading band of the dong will also be curtailed from current 5 per cent to 3 per cent, effective Thursday. As per an estimate, Vietnam's reserves have dropped from $22 billion at the start of 2009 to about $16.5 billion. On November 12, Vietnam lifted an 18-month old ban on gold imports to check panic buying that had dragged the dong down.

This is the third time in the last two-year period that Vietnam has devalued its currency. Previous attempts to check a long term slide in the currency had shown little effect. Full Story

The race to the bottom that we spoke of several years ago is now picking up steam as each nation competitively devalues its currency to gain a trading edge over its neighbor. In such an environment, one has to move into hard assets as it offers the best means to protect against this outright theft. One of the simplest ways is to this is to move into precious metals, there are more complex and highly rewarding strategies that involve taking positions in lumber, oil, etc., but for those that want a simple and effective way to protect themselves from currency debasement (inflation and possibly hyperinflation) is to take a position in bullion (Gold, Silver, Platinum, etc.). The time to take action is now for once the storm starts it might be too late; an ounce of prevention is worth a pound of cure.

The weather-cock on the church spire, though made of iron, would soon be broken by the storm-wind if it did not understand the noble art of turning to every wind.
Heinrich Heine,1797-1856, German Poet, Journalist


The Winning Zone

Saturday, March 13, 2010

Euro Woes Part II

The EU is poised to reach agreement on a potential multi-billion euro bail-out for Greece after weeks of crisis, senior officials have told the BBC.

They say the rescue package would be available if Greece asked for assistance to finance its huge deficit. Eurozone ministers are expected to finalise a proposal setting out a range of options as early as Monday.

Greece has not requested help so far. The EU says no deal has been agreed but technical work is continuing. Greece is struggling to deal with a 300bn euro ($419bn; £259bn) debt. It needs to raise about 20bn euros ($27bn) on bond markets to refinance debt maturing in April and May. Its deficit is more than four times higher than eurozone rules allow. Austerity measures aimed at reducing it have provoked public anger. The crisis has also undermined the euro. Full Story

This statement is a joke “They say the rescue package would be available if Greece asked for assistance to finance its huge deficit”. Off course they are ask for assistance, indirectly they have been begging for assistance from the very start. This aid package will trigger other beggar members of the PIIGS group to eventually join the handout club. Next in line is probably Spain. If the top members of the EU wanted to send a strong message to the weak members they should have stuck hard and fast to their previous claims that no aid would be forthcoming.

Greece should have been given a simple ultimatum, meet the requirements or leave. This marks the beginning of a new trend. As members cannot deflate their currency, they will run massive deficits as a way to deal with the inability to devalue their currency as means to make their exports competitive in the global markets. we have entered the devalue or die era, where each nation will eventually seek to devalue its currency as a means to gain a competitive edge over its peers. The US and China by pegging its currency to the Dollar are actively using this technique as a means to gain a competitive edge. Many Asian nations are also jumping aboard so expect this trend to pick up. If the EU is unable to find a long term solution to its problem, the EURO could end up becoming a relic of the past.


The Winning Zone

Wednesday, March 10, 2010

Americans are still living in the land of dreams

Most Americans still unprepared for retirement - survey

The percentage of American workers with virtually no retirement savings grew for the third straight year, according to a survey released Tuesday. The percentage of workers who said they have less than $10,000 in savings grew to 43% in 2010, from 39% in 2009, according to the Employee Benefit Research Institute's annual Retirement Confidence Survey. That excludes the value of primary homes and defined-benefit pension plans. Workers who said they had less than $1,000 jumped to 27%, from 20% in 2009. Confidence in ability to save enough for a comfortable retirement hovered at 16% of respondents, the second lowest point in the 20-year history of the survey.

"Americans' attitudes toward retirement have clearly tracked the economy the last couple of years, and that seems to be the case in 2010," said Jack VanDerhei, EBRI's research director and co-author of the survey, in a statement. The percentage of workers who said they have saved for retirement fell to 69%, from 75% in 2009.

While VanDerhei attributed the decline in current savings rates to job losses, mortgage problems and the suspension of corporate 401(k) matches in 2009, he said the economy isn't entirely to blame. "In previous years, there were a whole lot of people who had nothing to begin with," said VanDerhei. The gap between what Americans have saved and what they'd need for retirement is forcing workers to prolong their working years. Full Story=


Clearly,  the story above indicates that the majority lived well beyond their means. It's not that they did not make enough to save, it’s just that they spent more than they made because they thought tomorrow would always be sunny. In parts of Europe the savings rate is as high as 20% of one’s income and in most parts of Asia they save as much as 35% of their income.

For years, we have been warning and advising our subscribers to live 1-2 standards below their means and for those who could deal with it to push it to 3 standards below their means. In real terms 1-2 standards below means living within your means, as most have never lived within their means. Thus you would only move below your real standard if you moved 2-3 levels lower. However, any move down is a move in the right direction. We also suggested that this money should have been deployed into long term investments such as Gold, silver, Palladium and other related commodities. Strong pull backs should have been used to deploy new funds.

Continue to live 1-2 standards below your means, and deploy the saved money into hard assets. The problem going forward for those who have saved is dealing with the pain they are going to witness in the years to come. Believe it or not the current situation is still decent in comparison to what lies in store for the unprepared in the years to come. Can this path be altered? Off course it can, nothing is engraved in stone, but for that to occur, the government would have to cut its debt down, drastically cut back on new expenditures, reduce services, close its bases all over the world and stop being the police of the world, etc., chances of any administration implementing these severe changes are very slim.


The Winning Zone

Pension funds, taking on more risk just when they should be playing it safe

Companies are quietly and gradually moving their pension funds out of stocks. They want to reduce their investment risk and are buying more long-term bonds. But states and other bodies of government are seeking higher returns for their pension funds, to make up for ground lost in the last couple of years and to pay all the benefits promised to present and future retirees. Higher returns come with more risk.

"In effect, they're going to Las Vegas," said Frederick E. Rowe, a Dallas investor and the former chairman of the Texas Pension Review Board, which oversees public plans in that state. "Double up to catch up." Though they generally say that their strategies are aimed at diversification and are not riskier, public pension funds are trying a wide range of investments: commodity futures, junk bonds, foreign stocks, deeply discounted mortgage-backed securities and margin investing. And some states that previously shunned hedge funds are trying them now.

The Texas teachers' pension fund recently paid Chicago to receive a stream of payments from the money going into the city's parking meters in the coming years. The deal gave Chicago an upfront payment that it could use to help balance its budget. Alas, Chicago did not have enough money to contribute to its own pension fund, which has been stung by real estate deals that fizzled when the city lost out in the bidding for the 2016 Olympics. Full Story=

The geniuses finally decide that it’s time to take on extra risk just when they should be exercising caution. If they wanted to take on extra risk, would not it have been best to do so during boom times. Instead when times were good they played it safe and now when times a bad they decide to take on more risk. Pay close attention to the mass mindset at work. It always leads you to make the wrong decision precisely when you should be playing it safe you are triggered into take on extra risk and vice versa. Pension funds are going to take a severe beating as they are betting in the wrong direction and playing the wrong trend. Net result is that many pensioners are going to find out that their so called guaranteed pensions are not as safe as they once presumed it to be. In the years to come expect payments to drop and some funds will completely bankrupt themselves as a result of this stupid new ploy at trying to achieve higher returns. One cannot squeeze water out of a rock no matter how hard one tries.


Our average win ratio for the past 5 years in futures is over 70%

Friday, March 5, 2010

Robbing the Old to pay the Rich


People who treat other people as less than human must not be surprised when the bread they have cast on the waters comes floating back to them, poisoned.
James Baldwin,1924-1987, American Author

The senate boldly and blatantly refused to give 57 million elderly individuals $250 more. The story below highlights this point.

A measure to give some 57 million elderly people, veterans and persons with disabilities a $250 check was rejected by the Senate on Wednesday, a setback for the powerful seniors' lobby.

Social Security payments for the elderly and disabled will stay flat this year for the first time since 1975 because they are tied to consumer prices, which decreased amid the worst economic recession in 70 years.

That follows a year in which payments rose by 5.8 percent, largely due to a spike in gasoline prices."It is wrong to turn our backs on seniors in this moment of economic difficulty," said Independent Senator Bernie Sanders, who sponsored the amendment.

But Republican Senator Judd Gregg pointed out that the bill would defeat the purpose of indexing Social Security payments to inflation. "The law says it shouldn't be given," Gregg said. At least 10 Democrats agreed with Gregg and joined 40 Republicans to defeat the proposal. Full Story

Under normal circumstances, I would have just ignored this story and moved along, but when I read the statement that is boldfaced above I felt I had to say something. These morons and retards in Washington would not know what inflation was if it hit them right in the face and then drove over them.

The real and only definition of inflation is an increase the supply of money. It is not defined as in an increase in price as so many economists love to falsely proclaim. The money supply has gone ballistic, our national debt has doubled in the last 10 years, and we continue to create more money and a mind boggling rate. Therefore, inflation has not gone down it has only increased; based on this simple fact these individuals should not be getting $250, they should be getting between 600-1000. The masses are being blindly robbed via this silent Killer tax, otherwise known as inflation.

If Senator Judd and everyone who voted against this bill feel that we have no inflation, why are they are not lowering their salaries to compensate for this so called low inflationary environment? It will be a cold day in hell when anyone in congress voluntarily takes a pay cut. Senator Bayh was right, every incumbent needs to be kicked out and replaced with new blood; while not the perfect solution, it will send a message to these guys that it’s time to do something. When you bite the hand that feeds you, you are doomed to lick the boot that kicks you.

To add insult to injury this money is lent out to bankers all of which played a huge part in making a bad situation even worse. The Feds inflate the money supply and then freely give this money out to individuals who really don’t need but those who really need it have a hard time even getting $250 bucks.

We can see the effects of inflation everywhere;

Higher gas prices, higher heating prices, higher rents, cost of basic staples increasing, etc., etc

Gold one of the best measures of inflation is up roughly 400% from its lows. If we were in a low inflationary environment the price of Gold would not have risen so much. Oil is up over 800% from its lows and not too long ago was up almost 1400% from its lows. The average person’s salary has in no way kept pace with this torrid rise in the price of commodities.

We spend money defending other nations and trying to promote peace and justice in the world. Why can’t we spend some of this money on individuals that really need it? Where is the justice there?

What will congress have to say when Gold eventually trades past the 2000 mark and then hits the $3000 mark? They are now projecting that our national debt will hit 20 trillion in the next 10 years; at the rate we are spending, we would hit this mark well before the decade is over.

While we could provide reams of data illustrating how inflation has robbed and sent millions to the poor house, this time would be better spent on dealing on some of the basic measures one can implement to protect oneself.

The best hedge against an inflationary environment is to be in hard assets. That means anything that cannot be mass produced or just created; basically almost anything to do with the commodity's sector. Some of the easiest ways to hedge oneself are to buy Gold and Silver bullion. The best way to protect yourself from the evil effects of inflation is to live 1-2 standards below your means and use all this extra money to put it investments that will hold their value over time such as Gold or silver. Over 100 years ago one gold Coin purchased a very good handmade suite, 100 years later one Gold coin can still purchase the best handmade suite and if you go to Asia it will purchase even more. Can one say the same for 1 dollar?

Other means of hedging oneself involve purchasing shares in the companies that produce these essential commodities or dealing in ETF’s that track these commodities, some examples are, USO, FCG, GDX, GLD, SLV, CUT, KOL, MWE, MOO, etc.

In a follow up article we up article we will spend more time dealing with the specific measures one can utilize to hedge oneself against inflation.

Nothing in the world is more haughty than a man of moderate capacity when once raised to power.
Baron Wessenberg


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Thursday, March 4, 2010

Precious Metals and the Dollar

Keep on sowing your seed, for you never know which will grow -- perhaps it all will.
Albert Einstein,1879-1955, German-born American Physicist


The dollar has rallied very strongly easily taking out the lower end of the targets we projected several months ago. It almost closed above 81 on a monthly basis. Had it done this, it would have made the outlook even more bullish. The dollar has gone on to put in series of new 9 month highs and thus by contrast one would have expected Gold and the other precious metals to do the opposite. However, this has not taken place.


If we look at the chart of Gold, we see that while Gold went to put in a 9 month new high, Gold did not even put in a 4 month low. This is a very strong development and suggests that there is a very good chance that Gold could rally to the 1170-1200 range before pulling back. On the longer time frames, Gold flashed several strong intra market negative divergence signals; the most important two are mentioned below. .

The most impressive metal, however, is Palladium. The massive rally in the dollar has had almost no impact on the price of Palladium; it is still trading very close to its highs. If the precious metal's sector continues to hold up like this, one can expect it to literally explode upwards once the dollar rally fizzles out. From late 2008 to early 2009, when no one was paying attention to Palladium, we were strongly pounding the table on it. Palladium turned out to be the top performing precious metal last year and is still holding up a lot better than the rest.

Silver has taken the most severe beating so far and this breakdown could be (key word is could) providing an early warning signal.

Silver’s inability to trade past its 2008 highs strongly suggests that all is not well in the precious metal's sector, especially the gold sector.

On the longer time frames Gold has flashed many strong negative divergence signals the strongest of which were

1) The dollar putting in a higher low instead of a lower low when Gold went on to put in a series of new highs

2) The inability of the GDX, XAU, and HUI to trade to new highs when gold bullion surged to new highs

The potential for Gold (precious metals) to remain in a prolonged consolidative phase is still rather significant. The longer Gold trades sideways the more explosive the subsequent rally is going to be. However, there is the possibility that Gold could still mount a rather sharp correction if and when the Dollar surges past the 82 price point level.

A possible early warning of a longer correction/consolidation in the precious metal's sector will be given if the dollar can close above 81 on a monthly basis, or it can trade above 84 for 3 days in a row.

So far we have laid out the technical perspective for short to intermediate term rally in the dollar; our initial targets have already been fulfilled. It’s time to provide some fundamental reasons as to why the dollar is in trouble long term and why the precious metals sector and the commodities sector stands to benefit from these dollar woes.

1) The US has a massive current account deficit and it only seems to be getting bigger. The economist’s plays with numbers by stating that one month is less than the other and so forth, but the trend is up. It now comes close to 6% of our total economic activity.

2) The US needs to attract a whopping 1.8 billion dollars a day to compensate for the current account gap. This trend is simply unsustainable.

3) While Government officials talk big of a strong dollar policy, they actually favour a weak dollar. This serves two purposes, it helps increase exports and it allows the government to pay its debt with lower valued dollars. As long as the Government continues to borrow at these mind boggling rates, it is going to unofficially favour a weak dollar.

4) By inflating the money supply the government is imposing a nefarious silent killer tax on the masses. The only way to hedge against this outright theft is to hedge yourself by getting into hard assets (precious metals, lumber, oil, etc).

5) Our national debt is 12.4 trillion an increasing. However, this does not take into consideration all our unfunded liabilities such as social security and Medicare. If these are combined the Debt levels soar to well unimaginable levels.

6) 44 states are facing budget shortfalls. California is leading the way as it is expected to spend 50% more than it will generate this year. Now that is a really scary thought. Since 2007 US states have collectively spent 300 billion more than they have generated. These deficits means higher taxes and so far 33 states raised taxes but collections have plummeted to their worst levels in 46 years; you cannot squeeze water out of a rock. No jobs, means no revenues but states are selling new bonds at a record rate to raise funds; a recipe for a long term disaster.

7) Eventually the Feds are going to have to raise rates to continue attracting the huge amounts of money it needs to function. Overseas investors are going to start demanding higher rates. Higher rates will kill this fragile economy. Precious metals thrive in a high interest rate environment. From a long term perspective the bull market has only just begun.


The dollar has exhibited unusual strength; it simply refuses to correct, refusing to trade below 80 for any decent period of time. A close above 81 on a monthly basis will be the strongest signal that it could potentially trade to and past 90 before topping out. In the short term time frames, the Dollar is overbought and normally one would expect a pullback from current prices to roughly the 78 ranges. Gold, on the other hand is also picking up strength; this is clearly illustrated by its refusal to match the dollar by putting in a new 9 month low, instead it has gone on to put in a higher low.

On the longer time frames though Gold has still flashed several very strong negative divergence signals that need to be neutralized; two of these negative divergences were mentioned above. Thus the potential for Gold to correct/consolidate for several more months remains high, until off course the above signals are neutralized or a new buy signal is issued on the weekly time lines.

Right now Gold is holding up remarkably well In the face of a stronger dollar. If this pattern continues, then the next break out is going to be very explosive in nature; the dollar is not expected to mount a long term rally. Our long term outlook for the dollar is that it’s going to put in a series of new all time lows in the next 12-24 months.

From a long term perspective, all strong pull backs should be viewed as buying opportunities.

There are two ways of exerting one's strength; one is pushing down, the other is pulling up.
Booker T. Washington, 1856-1915, American Black Leader and Educator

Wednesday, March 3, 2010

An Illustration of the Mass Mindset in Action

It's not the bulls and bears you need to avoid -- it's the bum steers.
~ Chuck Hillis ~

1= Stock is going no where; its pure junk, let me look at something else.
2= Lucky break, its going to definitely crash.
3= What, it's still going up, earnings are not so good, people are definitely getting carried away, its going to pull back and crash.
4= Ahh, see I knew it was going to crash, thank God I did not buy. (Mistake the mass mindset misses the main point here. Yes it pulled back, but look where the pull back ended--miles away from its first break out. A losers mind can only see the picture for what it is not, by replacing it with a picture from his or her imagination. Since they live in a losing sphere they focus on the negative aspects but not on the positive aspects.
5= What happened here; this stock was supposed to crash, how the hell did it get here? Perhaps I should have bought, I could have made a lot of money; this looks like a sure thing. (So only halfway through stage 5 will the mass mindset decide its safe to venture out. Now this person finally musters the courage to buy.) Wow it actually went up, great, I'm making money.
6= This stock is going to go to the moon; let me tell all my friends about it; it looks like a sure thing.
7= What happened? it pulled back. Ahh, I am not going to fall for this like I fell for it last time (look at number 4). Time to buy more, buy on the dip, that’s it.
8= I knew it, its going up and I made more money, wish I had bought more. Next time I will invest more on the pull back. (Notice the loser’s mindset does not bother to take time to notice that the stock did not put in a new high. All that matters is that it went up.)
9= It's going down again, time to really load up; I don’t want to lose this opportunity. Earnings are great so it must be a good time to buy some more.
10= First dose of bad news and the stock takes a big hit; okay, this is just temporary; it's going to go back up. (Blind faith huge mistake, one of the main ingredients of a losing mindset). Let me buy more and average down.
11= Maybe I should sell now; things don’t look good, but you know what, let me just hold for a bit longer. Maybe things will change. Yeah, things have to change; look how fast this stock went up and it has pulled back so much. The worst is over; it has to go up.
12= This stock is dead, I have to get out; it's not going anywhere (this is when the stocks start to bottom. The secret programmed desire to lose syndrome has completed its mission. Trader is in state of extreme distress and shell-shocked). I am never going to look at this stock again; I knew it was garbage, why did I ever buy it in the first place?
13) Slow base formations and the possible start of new up trend and the worst part is that this trader is out.


Take a close look at the above picture; the masses will react in the same way when it comes to this commodities bull market. They will dump when they should be buying and then they will try to buy when they should be selling. Nothing in this world comes easy for if it did, it was not worth it in the first place. So make sure you’re positioned well to take advantage of the coming spectacular bull market. So far we have just barely begun the first run.

This is not to be confused with the concept of buying and holding. Every now and then it's prudent to take some profits off the table and invest this money when there (gold, silver, oil, etc) is a pull back. However one should always maintain a core position as long as the long-term trend is up. That’s exactly what we did; we took profits in November-December 2003 on ½ our positions and are waiting for an opportune moment to add to them again. When we wrote an article suggesting that individuals take some profits on their gold and silver positions, we were attacked on the basis that we were trying to promote a sell off. We specifically stated that one should not sell their core positions, but only take some money off the table; but everyone seemed to miss the last part of our statement. If you look closely most of 2004 Gold stocks did not really do anything and in most cases actually lost money. However, this type of behaviour is quite normal. First you have a massive move up, then sideways to down, and then a final quick pull back to flush out all the weak hands. Now just when everyone should be studying the charts to look for new entry points, the weak hands will start to unload their core positions and this will indeed be a fatal mistake.

It is what we think we know already that often prevents us from learning.
~ Claude Bernard 1813-1878, French Physiologist ~



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