Markets
Subscribers to TGR are not surprised by the stock market’s dramatic decline in February. With the S&P500 at 829 on February 13th, I sent an email to subscribers warning that the market was headed to under 700. We’re well on our way. For short sellers, this has been a very profitable month. For long-only investors, they’ve successfully avoided the trap of investing in a bear market. Some columnists were advising readers to buy the indexes in January 2009 because extremely bad years are always followed by good ones. Not this time.
The losses in most asset classes have surpassed the 1973-74 bear market and we’re headed lower. Continue to avoid the stock indexes until my model indicates a change of trend.
NOTE: This version of the newsletter is for indexing purposes and omits the graphics and formatting. To read this document properly go to the formatted newsletter.
Here are my postings between Feb 1 and Feb 15. (Postings more recent than 30 days are reserved for subscribers).
05 Feb 2009: The stock market is over priced at 845 and upside is limited but there's not a trade here to the downside. I read discussions of a coming recovery in stocks but don't see how that's possible.
06 Feb 2009: Deflationary pressures continue. USO (oil etf) hit a new low today. A market like this is very dangerous because asset prices appear low and draw investors in. Then prices go lower. The economic numbers indicate an economy still in decline. The S&P500 is at 863 and toppy - stay out!
10 Feb 2009: USO (oil etf) hit another new low indicating the powerful deflationary forces still active in the economy. As I warned on 6 Feb, the S&P500 was toppy and today it dropped 42 points to 827. The aggressive investor will be offered the opportunity for short term swing trades in the months ahead but these will require prompt action. Gold is performing well and I believe it's prudent for most investors to have a core position. The cautious investor should avoid the stock market and all upside speculations in other stock asset classes too.
12 Feb 2009: Don't be tempted by the S&P500 mid day level of 815. This market has a lot of downside left.
13 Feb 2009: The S&P500 is overvalued at today's open of 829. The market's indicated value at this time is below 700. The wide divergence between price and value is not likely to diminish any time soon and will place downward pressure on stock prices. This process could occur suddenly or gradually. If the market adjusts over an extended period, the decline may not be severe but the direction is down. Investors should consider exiting the stock indexes and moving to cash to preserve capital. There's simply too much risk here to wait it out.
On February 27rd the S&P hit 735, a decline of 12% in two weeks. My model indicates the market is going lower still.
Bond investors will get their coupon yield in high grade corporate bonds until rates move higher. Bonds are often reverse correlated to gold. It’s not exciting but 6% is better than the zero offered by money market accounts. VFICX is down about 1.5% year to date and the broad bond market tracked by VBMFX is down 1.2%. Short term bonds are also down a tad.
Gold investors have experienced good year to date returns. Again, TGR, is in gold and doesn’t see a change of trend on the horizon. You must be willing to accept extreme volatility with gold. It’s best held as physical bullion and as a separate core asset from your general portfolio. Of course, you can hold a gold etf also if you use retirement funds. Gold mining stocks are not appropriate for core gold investment.
Oil
I continue to watch the oil market but have held off from buying. This has been the right decision as tracked by the price of the USO etf.
Much fuss has been made about how West Texas Intermediate oil is priced much lower than Brent crude - a reversal of normal. I expect WTI to readjust and to move close to Brent but that’s not the critical factor.
The longer term fundamentals for oil prices are very positive. Short term we must wait for the world economy to rebalance and reach a solid low for crude oil. A low can go far below the equilibrium level. This brings up an important point in investing. It’s very good to have theories or a broad game plan for an asset class but you need confirmation in the price action before investing.
Two factors are causing me to be cautious with oil. First, the US is filling its strategic oil reserve again and maybe with WTI. Second, major world producers are cutting back on production. Both are efforts to prop up prices as demand wanes from contracting world economies. When economies eventually do expand again there will still be supply slack in the system. Thus, oil prices may not rebound immediately as usage grows. That’s ok but you don’t want to buy with an artificial supply constriction in place and with artificial demand. I’m not saying you’ll lose money but you may experience dead money until the natural order reasserts itself.
Oil is in world-wide depletion and the longer term fundamentals are very good for higher prices but there’s no need to rush in just yet. If economies do rebound, I believe oil prices will respond in short order. If economies don’t rebound or continue contracting, oil will also go up but it will take more time. It costs us nothing to wait and it’s the right thing to do.
Systemic Transition
Hand wringing about the economic contraction has been focused on banking problems and stock prices. It’s been called a credit crisis. I suspect it’s really the collapse of an unsustainable economic system and a shift to something more in balance with our demographics and national checkbook. I can’t proclaim that with certainty but that’s my educated assessment. I’ve previously recounted the history of failed empires and how they can easily go from great to gruesome in thirty years. The process takes a nation from immense prosperity to poverty and it doesn’t happen by accident. The weak underpinnings were there for everyone to see.
The shift I expect has immense implications for your purchasing power and general welfare. I’ll discuss this idea and tie it all together and present my conclusion and the trends I see ahead in our future.
I’m not all that worried about the banking system and mortgages. In a fiat money system, they can paper over almost anything given enough time and ink. The banks aren’t the problem because the Fed just gives them digital money any time they want. It’s meaningless. The real problem is in the real economy – the one far away from D.C. and Wall Street where people actually work and make things.
What I see coming is a realignment of America’s share of the world wealth pie.
I’ve often discussed how the US economic expansion of the last thirty years was made possible by debt expansion. I wrote a brief white paper on the topic 18 months ago - prior to the stock market collapse. The paper was called Debt Closes In – Nowhere to Hide. I explained the debt expansion and what would soon occur. I didn’t get the future scenario exactly correct but was maybe 90% right. I wasn’t negative enough.
Our economic troubles have been building since 1971. That year, Nixon broke the link between the dollar and gold. It allowed for the unlimited expansion of fiat money. The 1970’s were highly inflationary. In 1976 we had the transitional Jimmy Carter – a very good man but a guy soon overwhelmed by changes beyond his control. Ronald Reagan was elected in 1980 and he moved away from printing inflationary money to printing debt certificates starting in 1982. The chart shows that clearly.
Reagan was hailed as a great conservative hero because he broke the back of inflation and continually expounded his optimism and apple pie ideals. In reality, Reagan made the decision to make the US a debtor nation. That crazy idea set this nation on its present path and it’s been continued by each successive president. Debt allows a higher level of growth – the people and the politicians love the expansion phase. The banks got bigger, the military became huge and social programs flourished. Economic growth would have been a lot lower without deficit spending.
We’re now in the contraction phase and nobody will like that one bit.
Clinton tried to stop the expansion of debt but didn’t make enough effort during his eight years to hammer the idea home with the public. He also made mistakes while pandering to the banking elite. He did reduce the rate of government spending and that brought about the 2000 recession and the subsequent stock market decline inherited by George W. Bush.
America has historically made the right decision at historical turning points but in 2000 things went wrong. Our fate was sealed in 2000 when we elected our 43rd president. At a critical point, when circumstances demanded restraint and resolve, George Bush made one of the greatest national leadership errors in political history. Facing a deep recession, he could have held the line and heroically refused to re-inflate the debt bubble. Instead, he doubled the national debt, cut income taxes, and started two wars. At this critical time we needed wisdom and didn’t get it. Bush was simply a manifestation of our collective bad judgment. We elected a simpleton because as a nation we had become foolish and complacent.
We were once a nation of ideals and principal. But, money corrupted our political process and the media spent more time examining a candidate’s wardrobe than his character. We are a Madoff Nation.
We went from George to Bernie.
There is quite a resemblance and a world of difference.
George Washington couldn’t tell a lie so the story goes. Madoff allegedly operated the biggest affinity fraud in history – a Ponzi scheme for the mostly very well to do. He pulled in Jewish people by word of mouth and was trusted because he was one of them. He made deceptively decent returns every year and few bothered to ask how that was possible. Failure wasn’t a concern.
That’s the way most nations used to view the USA. Our economic collapse has affected the whole world.
The actions of Congress and the Obama administration in further ramping up debt and spending is a continuation of the debt Ponzi scheme. It will have a bad end. How can anyone expect a good outcome when they’re duplicating the Bush strategy x 4. They must know it’s too late to change the course of events or to salvage any semblance of honest finance. If so, what are they hoping to achieve?
The spending buys time and the eventual inflation will buy a ticket out of debt. Obama’s team feels they have no choice now but to shift the economy into socialism because they can’t bring it down gracefully. It can’t be fixed – it can only be inflated and further perverted. You can hear the tone of false hope while the President puts on a brave face. Our national debt will hit $15 trillion within four years – an amount that cannot be paid off. They must prepare a financial safety net quickly or risk social anarchy.
Obama has plans for us. He’s allotting over $600B for his national health insurance initiative. He says it will be paid for by higher taxes on the rich. That eventually means you and anyone else earning a living. The economic crisis provides an opportunity to sneak in a high cost, low service health system paid for by taxation. It will replace Medicare and if you have money left you won’t get squat until you’re broke.
Obama’s team has inherited a disaster. It’s the termination point for the fiat money society.
Failure of the American Model
Why was the debt bubble started in 1982? One reason given was that we needed to expand spending to defeat the Soviet Union in the cold war. That’s a little bit true. The real reason is what I call The American Model. America expands its influence by aligning nations under an expanding military umbrella. We have bases all over the world and a vast fleet of warships. In exchange for protecting nations with our military via various treaties and NATO, it allows a broad expansion of American industry. The protected nations can spend their money on products they buy from America because they don’t have to fund a big military. There’s nothing new about this idea – it’s what great powers have always done. The Soviet Union did the same thing. It’s a win-win for everyone up to a point. It’s accepted if the great power is beneficent. It works as long as the dollar is the world’s reserve currency and our economy expands faster than our debt. We expanded our financial machine but gave away the foundry jobs to China.
Eventually, you get diminishing returns if the debt growth rate exceeds the production rate of real goods. We went far past that point after 2001. We expanded our financial system with bad mortgages and then infected the world with securitization.
We had a great game going. The dollar is the main currency for pricing commodities and certainly oil. As such, we simply print money and others accept it because they all needed it to buy oil. For example, we have military bases in Germany and employ large numbers of Germans. We print money and buy Euros and pay the Germans. Our national debt inches up a bit more. This goes on all over the world. Wherever we have a military base or a need to prop up some dictatorship, we spend money. We give money to Israel, Egypt, Pakistan and on and on. They all buy weapons from us and airliners and stuff gets destroyed and people die and they buy some more. This is what empires do. We have a picture of our kings on the money just like the ancient Egyptians and the Romans. Same game, different epoch.
After 2001, we doubled the national debt and concocted bond insurance, CDOs, subprime loans, a housing boom, stock boom, and 40:1 bank leverage to squeeze every last bit of slack out of the debt economy.
In 2008, the system broke. The limit of leverage was reached.
Home prices started to fall and the securitized paper wasn’t worth what banks paid for it.
The debt ball now started rolling backwards and began to unwind what it once built. It’s unraveling the same way it expanded but much faster. The first thing to go were the issuers of CDOs and packagers of mortgage paper. Bye, bye Lehman Brothers, Bear Stearns and AIG . Then the nation’s biggest banks failed as their 40:1 leverage rolled back over them. So long, CitiGroup and Bank of America and all the rest.
Without rising home prices and debt financing, sales slowed as the consumer economy went toes up. It is pulling down vast swaths of retail stores and over-expanded office space and the Reits that own it. Reits are down 34% year to date in 2009. Major retail chains are in trouble and ones below are on life support.
Next to go are the major insurers and pension funds.
As businesses close up, so will the supply chain and corporate profits. Tax receipts will plummet for states and the federal government.
Job losses will accelerate. Spending will continue to decline and markets will continue to fall. Housing will stay weak.
As some point the “full faith and credit of the United States” will be questioned and also our bond rating and ability to issue limitless debt.
And then we get into real trouble. Without confidence in our debt and a vast banking system to sell it, the American Model will fail. This will happen when the dollar loses its crown as the world reserve currency. It will be rejected by other nations and replaced by a basket of currencies. At that time, the US military will contract and our military bases will close up around the world and our fleets of warships will return home.
Eventually things might roll back to 1971 and gold will be required once again to balance our foreign obligations while the fiat dollar will be used within our borders.
Just as financial events have expanded far past the point of equilibrium they will contract past it too. The contraction phase may get far worse than we can imagine. For example, the average state pension fund is 35% underfunded according to a recent article in Forbes. That number is probably from October 2008. I’ll bet its’ closer to 50% now since stocks are way down again in 2009. What about all the insurance companies that are on the hook for annuities and pension conversions? They have to be deep underwater too according to this article. Many insurers have inadequate capital. They can’t earn enough on their assets to meet their annuity and insurance obligations. Some are trying to get more cash out of their customers. Here’s what a subscriber sent me.
“We got a call from our Allstate agent today. He had a "deal" to discuss. For an extra $43 each 6 months, Allstate is offering us a "forgiveness" option. We will be allowed one accident OR one ticket without an increase in our policy. If we reject the offer and get a ticket or have an accident our policy will double. We've been with Allstate for 30 years and have never filed a claim. But it appears the rules have changed along with the economy. Think trouble is brewing out there? Yep, I think so”.
The whole system is broken. The banks, pension funds, insurers, the government and many of your neighbors are bankrupt. This isn’t going to be fixed.
My stock timing model has successfully avoided the down phase. There will be an up phase but it’s not near. I suspect the worst is yet ahead.
What About the Rest of Us?
The US has 4% of the world’s population but consumes 25% of the world’s energy and makes up 23% of the world economy. Our economy was bloated due to debt and temporary large profits and greatly enriched by being able to print money with abandon. Once the pension funds implode and the insurance companies collapse and housing hits bottom and after you subtract out all the personal debt, I’d guess that the average American has a true net worth maybe double that of a Kenyan.
The whole system was like an automated feeding system for corporate profits. It was well lubed with cash extracted from borrowing on housing and big spending from the government. They sucked the assets out of working Joes via loans, insurance and 401k plans. Wall Street owned the banks and the corporations and paid out the campaign contributions that corrupted the politicians who made the laws to benefit the bankers. The system worked great for 25 years and then one day Joe couldn’t borrow anymore and the machine stopped.
The corporate managements had stopped paying dividends because it might go into Joe and Jane’s 401k. Instead they gave themselves huge salaries and stock options. Bill Gates extracted his share. He got mega billions and now appears magnanimous giving mosquito nets to poor people in Africa.
Buy and hold of blue chip MSFT has been a money loser. It’s back to 1995 levels. It got so bad, Bill had to start paying a dividend.
GE is now a shambles after a huge dividend cut. So much for this buy and hold forever disaster. Did I mention that Jack Welch is worth $720M? GE is back to 1995 levels.
In case you’re interested, the 1995 level for the S&P500 was 500.
That game is over unless America can juice the system back up and get the average Joe and Jane to spend again. It isn’t going to happen. The government continues to spend but that won’t cut it. Obama thinks he can move America into a new social welfare society. Good luck on that.
Now imagine that you’re the other 96% of the world’s population outside America and you stand stunned by the sudden collapse of America’s banks and stock markets. This is the perfect time to take the yoke off your back and ask the empire for a better deal for your own country. Why shouldn’t your nation’s currency have a bigger role. Why should America alone be allowed to print all the money they want. It won’t be long and they’ll start to talk among themselves. Perhaps the way out is to unlink from the United States and the dollar.
I wouldn’t be surprised if America and other major nations preempt the inevitable and concoct a new trade currency system themselves. Ron Paul, a member of the banking committee, was mistakenly given the floor to ask Ben Bernanke a question during his February visit to capitol hill. Mr. Paul used the two minutes to tell Ben that his gifts to the banking system are not real capital and the bailout plan won’t work. Then he mentioned a new global currency system that’s in the planning. Listen to the clip. Maybe Mr. Paul knows something. If so, it would confirm my logic that the dollar is a doomed currency and they’ll try to shift to something new to salvage the empire.
Folks, add it up. National health insurance, higher taxes, debt that can never be paid off, a totally bankrupt financial system, falling house prices and the average citizen deep in debt. Their solution is massive government spending and more programs. And then we’re told by the experts in Elliot Wave Theory that the problem is deflation and we need to hang onto our dollar bills.
But the Elliott Wave / Dow Theory / Trend Chart / Head and Shoulder Formation Says We’ll have Deflation and …...
Do you believe in voodoo? Practitioners of these various systems leave me befuddled. This stuff is usually based on Fibonacci numbers or a galaxy of bizarre chart formations. Fibonacci was the greatest mathematician of the middle ages. The number system named after him was simply a sequence he used to forecast the reproduction rate of rabbits. For heaven’s sake – it has nothing to do with financial markets or predicting cycles.
All I can say is do the work and pencil out the buy and sell points for yourself and watch how often they fail. They are not predictive. These are attempts to impose a mystical cycle system on the financial markets. They appear to work once in a while. It’s like someone saying they have a bowel movement every day at 10am. Keep a log and confirm it – well, I guess that one was off by 45 minutes. You betcha.
Likewise with moving average systems. You need to actually track these things for 30 years like from 1960 to 1990. Compare your systems to buy and hold and be objective. Add up the losses from short term whipsaws – don’t look at just the big market drops and upswings. It’s the little 2% stuff that eats you alive over time.
Where is the Inflation?
The problem with economics is the interpretation of the data not the data itself. Government officials like Bernanke are always on the hot seat being asked to predict the future based on the past. Grandstanding congressman trot out the Fed chief and ask him stupid questions for the TV cameras. On February 24th he testified before congress and provided his expert opinion. He gave a possible scenario for the recession ending in 2009 but with a very wide uncertainty range. The markets heard the word recovery and jumped higher.
President Obama in his televised speech that evening said we’re not quitters and a recovery will be a long process. He also said we’ll be out of Iraq by August 2010. Everyone applauded. The real message is that massive military spending cuts are ahead because we can’t afford this empire.
The Republicans are playing tough trying to make points by resisting his spending initiatives. Agreed - I think the spending is nuts too. But, those corrupt fools have no credibility after eight years of mindlessly supporting Bush’s destructive actions.
Right now, many are predicting massive inflation because the money supply, by some measures, is zooming. The Fed says price inflation will remain low through 2010. The Fed is probably right. Others predict a great deflation lasting for years. The Fed doesn’t say that because they know better.
But, if so much money is being printed around the globe then why aren’t prices rising? Probably because the money isn’t being spent and is being saved to offset declines in asset prices. It sits at the banks. It won’t sit there forever. The Fed has stated explicitly that it will target a higher inflation rate of maybe 2%. Former chief economist for the IMF, Ken Rogoff, stated that the Fed should have a target of 6% while admitting the situation could spin out of control. He said the government has no choice. Rogoff was prescient about the credit collapse. He said standard monetary policy has broken down and we’re flying blind.
The Fed made a mess of things but it’s not independent. Ben works for Congress and is doing his job. He isn’t at fault just because the politicians want to prop up and reinvigorate the false economy. Bernanke knows it won’t work but he doesn’t dare admit it on TV. In truth, the real inflation is manifesting right before our eyes. Currencies are declining against gold across the globe. The dollar system is unraveling and there’s nothing to take its place so the yellow metal moves up out of fear.
In my opinion the higher gold prices near $1000 aren’t justified by present inflation rates. Instead the market is looking forward like it always does. For the world economic system to stabilize, there has to be a dominant currency to act as a trade unit. There is none that’s worthy of the title. That means massive change is coming as the world financial system morphs into a new form.
The deflationists have their charts and numbers but are only right if the dollar existed in a closed system. It’s not closed. The dollar can be repudiated by nations refusing to use it. The biggest loser will be the dollar because it’s the failed reserve currency. It will have to be formally rejected eventually. Most readers of this newsletter hold cash and perhaps feel a sense of serenity because the market declines aren’t affecting them. The time will come when you’ll have to make changes. There won’t be a certainty of success but to do nothing will bring you face to face with your fear and with no way to escape.
Media mogul Rupert Murdoch gets it. He sent a cryptic internal memo out to employees this month. It said, "We are in the midst of a phase of history in which nations will be redefined and their futures fundamentally altered."
He sounds panicked and probably because News Corp is hemorrhaging but he is right.
Inflation will hit eventually in the form of rising prices. There’s no doubt in my mind that the Fed can engineer inflation and they will. They must get rid of the debt. Crises often have the same root cause but manifest differently through time and it adjusts for each era. My theme is the world financial system makes a break with the dollar. I don’t see commodity producing countries or China complacently selling their resources and production for long into a weakening American economy. They’ll want some value.
Stocks May Not Come Back for Quite a While
I suspect inflation won’t happen as we expect, i.e. inflation ramping up over the span of a few years. It will probably hit suddenly. As with the stock market decline, most people will remain hypnotically complacent choosing to believe assurances that it’s just a phase and no big deal.
It’s near impossible to get most people to take action. Why do you think the great genocides were possible? The danger is there for everyone to see but until the crowd surges or the bodies pile up in their front yard people refuse to act; to leave or take defensive action and then it’s too late. I warned my neighbors about the coming market crashes months ahead of time. They did nothing. One has lost 45% of his net worth. He told me he’ll act when the losses exceed 50%. This state of stupor comes from seeing what’s happening but not trusting one’s own fears and not knowing who to trust. In a way it’s quite understandable.
Another neighbor attended a funeral last week for a friend he knew for 30 years. She had mortgaged the house and bought high yielding unsecured securities suggested by a financial advisor. All now worthless. This fine person ended her life in the garage.
Why didn’t the Jews in Germany flee in the 1920s? Because they had businesses and family and a culture and giving it up was a kind of death in itself. Still, there was a middle path of secreting money out of the country or moving it into gold and some did that. It was the more world-wise who acted while the trusting types and those who assuaged fear were left to confront what they could no longer escape.
Our great change will come as our currency is gradually rejected by the world financial community. A devaluation will push up the price of imported goods. This is what happened in Argentina and Russia during the last twenty years so there is a recent precedence. Such an event would cause a dramatic decline in our standard of living and start the readjustment process. It would force manufacturing to return stateside. Will your finances survive the transition?
The dollar must decline to be competitive. We have to manufacture things again because our finance and consumption economy is gone. But, we won’t manufacture if the products can be imported cheaper than we can make them. Therefore, the dollar must fall or others must rise.
The world knows we’re broke. We all know manufacturing must return because we can no longer expand our economy by borrowing and spending. There’s a reason why the Treasury can’t expand the economy by mailing checks out to everyone. People will spend the money alright but the cash will all go to China and Malaysia where everything is manufactured.
We’re all in a tough bind here. At TGR we’ve managed to avoid the stock collapse and we own some gold but do we go all in? I can’t answer that or advise what you should do. I don’t trust the Obama plan, our corrupt congress or Wall Street. I do know the system is collapsing right before our eyes.
The Return of the King?
Consider this idea. In a world of weak currencies where the dollar is poised to fall from its throne, what can replace it. Gold? There isn’t enough gold in the world to act as the foundation for a restructured monetary system. Unless …. unless the price of gold was much higher. The US has the world’s greatest gold reserve.
In a worldwide banking and currency crisis, why wouldn’t the world gravitate towards gold and why wouldn’t gold retain value? The major nations owning the biggest hoards would retain their status and have a better chance of maintaining the status quo and their relative power. Once the idea started to catch on there would be scramble by national treasuries to own more gold. At a very high price, the US could sell some to reduce its foreign debt. This idea isn’t extreme when you consider that the gold standard was the reality only 35 years ago.
Below are the top gold 20 hoards in tons as of September 2008. - Source
In 1915 a Model T cost $450 and gold was $20/ounce. It took 22 ounces of gold to buy the car. Today a modest car costs at least $20,000 and gold is $950. It takes 21 ounces to buy a car. What will a car cost in ten years? That all depends on the dollar and the cost of imported commodities used to build an automobile.
When you consider that our economy was expanded since 1982 due to massive debt incurred by both governments and individuals, there is clearly a need for a moderation. The most likely event is first a worldwide contraction of economic activity. I suspect that within ten years 25% of the S&P500 will no longer exist having gone broke or been merged away.
Next, the world economy must break away from the dollar. They can’t wait around hoping we’ll pay down our national debt or find a way to grow our economy. The major powers must either introduce a new global currency unit or the world is destined to gradually reshape into spheres of activity more independent from America and the dollar. It’s critical to understand that this is starting already. It will require nations to create a composite currency for trade. If that fails, an alternative is to use gold as foundation reserve but that would require a price much higher than today. I think we can see this process already taking shape as China hedges its bets.
China's central bank is considering raising its gold reserve by 4,000 metric tons from 600 tons to diversify risks brought by the country's huge foreign exchange reserves, the Guangzhou Daily reported, citing unnamed industry people in Hong Kong. – FxStreet.com November 2008
Gold stocks have moved up sharply over the past few months. I don’t like most gold mining stocks because they have a history of share dilution and management looting of shareholder value. However, the price of gold and the action in mining stocks is important.
Local Banking
I was in another state recently and met an interesting guy. He lives off the electrical grid in a modest but comfortable house. Drives a modest car. He has an engineering degree and worked for 20 years in the system and then got laid off. He and his wife work for themselves now. They have a big garden and an easy going lifestyle.
So far, I was on the same page. I live a rural lifestyle with a nice garden and drive my beloved 15 year old pickup down the dirt roads.
They’re happy, well-adjusted people but live a bit differently from the average person. They make a living in the underground economy and pay little in taxes. They show little in visible assets. Every few months when gold takes one of its periodic dives, they do their banking. They buy some gold coins and place it into their Obama Bank. It’s a piece of 4” pvc pipe buried in the back yard.
They have bank guard named Brutus – a pit bull/boxer mix.
They have substantial savings in an IRA. This money isn’t counted as a qualifying asset for public assistance or for student grants. It’s also untouchable by lawyers in civil court judgments. The kids went to college free using Pell Grants and other handouts provided by the Federal government.
They’re healthy and don’t pay for health insurance. If they need some medical care they pay out of pocket. If something big happens they’ll just show up at the hospital emergency room for free medical care like the millions of illegal Mexican immigrants in America that our government refuses to deport. The law says you can’t be turned away.
In short Tim and Lydia have dropped out of the systems – the banking system, the health care system, the tax system, election system, legal system and the world of government rules. Needless to say, they don’t vote and don’t care.
I listened to this and asked Tim if he worried about breaking the law. He told me, “Once you decide to walk away from the plantation and stop working for the master, you start to understand how to live free. It’s no big deal”.
There’s a logic to this. Anyone who started saving 15 years ago and bought into the great American stock market has little to show for it. If you invested in stocks, you’ve lost a lot of money. Remember, you paid taxes on your paper stock gains at probably a 25% rate. You paid the mutual fund 1% every year and your financial advisor got 1% every year too. The indexes are now headed back to 1995 levels and you lost all the inflation too.
If you invested $10,000 in the S&P500 on 12/31/1995 you’d have zero in gains. But, you would have paid out perhaps $1300 in mutual fund fees, $1300 in investment advisor fees and you’d have $7400 left. The actual buying power of your remaining money is only $4800 due to 35% of accumulated inflation. I’ve graciously ignored all the taxes you paid on the phantom income. This is why the average Joe and Jane has no savings – it was stolen by government debt, expenses and inflation.
You would have been far better off just paying down your mortgage each month and owning your house free and clear like Tim and Lydia. Or, bury silver and gold in a hole in the ground and feed Brutus the pit bull.
$10,000 in gold would now be worth $23,700; three times better than “investing” using buy and hold.
In Brutus we trust. He’ll protect your wealth better than the SEC ever did.
Americans vote, invest and play by the rules and work hard. Their savings have been taken away because they trusted in 401k plans, corporate executives and congressmen.
Many illegal immigrants don’t pay taxes, don’t invest in stocks, don’t pay car insurance or health insurance and don’t vote. They can get bank accounts and debit cards without needing proof of identity unlike us taxpayers. They work hard and can own homes in America and start businesses. Their kids can attend college and get in-state tuition rates. They don’t panhandle and keep a low profile. Obama will legalize all of them within four years. Who’s been the smart one?
The states are raising numerous taxes to get revenue. The Feds will cut promised benefits for anyone who saved and who has assets. To have any sort of life will we be forced to live like illegal aliens in our own country?
Questions for President Obama
Now, Mr. Obama, tell me again how more government spending and debt is going to help me.
How has voting Democrat or Republican helped me since you’re both on the take from special interests?
Why are the congressmen criticizing the SECs many failures the exact guys who greased the laws for Wall Street and the banks?
Why am I paying taxes to a government that has failed to protect my money and my home from the greed of Madoff, Wall Street, and corporate executives?
Why should I trust you over Brutus to protect my savings and my family?
Summary
Stocks
My stock model shows the S&P500 is headed down to under 700 and lower. There’s no upside in stocks. Foreign markets are closely tracking the US.
Bonds
The US bond market is marking time. Without inflationary pressures, it won’t lose much. It will earn its coupon in 2009 but that’s about it. 6% on corporate bonds is not terrible. Still, I’m not enthused about bonds and risk grows with time.
Gold
Gold remains in an uptrend that’s unlikely to end anytime soon. I don’t expect huge gains in 2009. Gold tracks inflation over long periods of time but past inflation is priced in. Prices above $800 are anticipatory. America faces a diminution of military influence and a declining standard of living. If things get really bad, gold will be there.
In this kind of market, not losing is winning. We should expect extraordinary events in the years ahead. Cash is not trash. It’s necessary for paying bills and general living expenses. However, without honest reform the dollar will
surely decline and so will our nation’s position in the world.
Investors have lost 50% of the value of their stock market investments over the last 15 months. If the dollar declines with America’s military, they could lose another 50% of what they thought was safe in cash. As for those who say to hoard dollar bills, remember, all US paper currency prior to 1913 is no longer legal tender. Currencies come and go. Longer term, your money must be invested in tangible assets and solid corporations and not ones run by looters. The focus of this newsletter is on market timing and buying assets at the right time and right price. My goal is to survive the transition.
Q&A
Q. Is shorting the market at these levels too risky in your opinion (S&P500 at 789)? I am slightly short now. Would I be better off taking profits off the table?
A. I don’t provide personalized investment advice and never short myself. When my stock model says things are going down, that’s the trend. Bear market rallies are always possible. The market subsequently lost 7% more from the time of your email. I can’t make buy and sell decisions for subscribers.
Q. My daughter has all her 401k money in stock funds. So what should she do right now?
A. My stock model says to avoid stocks at this time. I would only invest money in a 401k plan up to the match amount of the employer. If they don’t match, don’t invest. Most employer plans only provide high expense funds with front or back end load fees charging up to 8%. What value is a company 401k if the fund steals 8% or the employer won’t match? She’d be better off not contributing and using a Roth IRA where she can buy GLD or good dividend stock funds.
Q. Since joining TGR in early February, I have received only one alert for your postings on the subscriber page. That was a couple of weeks ago. Have I perhaps dropped of the subscriber email list?
A. TGR is not a trading system so alerts are infrequent. I only send them when something important has to be conveyed. The February email was not an alert but more of a warning that stocks were set to plummet. For the record, I did not count this email in my market timing results. Yes, short sellers could have made 12% in two weeks but I personally don’t short. I only count profits for my timing systems on a completed buy and a subsequent sell.
Q. My records indicate that you are refusing to borrow money and spend it foolishly. Your decision along with millions of other Americans is now deflating our gas bag economy. Since you refuse to cooperate I have ordered congress to spend it for you. Your bill will follow shortly. Signed, Barrack Obama
A. Very good, Mike. Thanks for the humor.
Q. I purchased VFICX the day after you recommended it at$8.66. At the present time it is down to $8.48 do you think that if it keeps going down I should double down or just hold.
A. I never double down. It’s about 10% of my portfolio. The bond fund is down about 1.5% year to date after counting the February dividend which should be about 4 cents – not posted yet. If the fund loses 5% ytd, I’ll exit but we’re a long way from that point. You can track the YTD return here.
Q. I have about 5% of my assets in a gold ETF which I bought in my IRA last summer. Now that I discovered your research, read your book and finally became a subscriber to the report I'm struggling with the decision whether I should buy another 5% of gold or invest in the commodities fund (DBC).
A. Commodities have cratered in price but may be close to a turn. They will move up powerfully with improved business conditions or inflation. Oil makes up about 60% of most commodity funds. I don’t have a timing model for commodities but watch it closely. I do model gold and it’s in an uptrend but was pricey at $998. If the timeframe for holding either asset is 3 years, I think oil and gold will both do well and so will DBC. The week to week movements are noise.
Q. I’m starting to see more and more articles on the net regarding poor agriculture forecasts and drought in many areas for 2009. Looking at DBA and RJA (ag commodity ETFs) graphs, they are showing possible bottoms in early Dec ’08. While many would argue deflation will keep all commodity prices down for the foreseeable future, if the long range forecast is for food production to go down globally could this now be the time to start watching agriculture plays in earnest (ETFs and ag company stocks)?
A. The decision to invest in commodities is a speculation. Using logical analysis is good but the price action must confirm it. If commodities do turn there will be plenty of time to get in. I know nothing about agriculture. I will use a broad commodity fund like PCRIX or one of the ETFs.
Q. Is it too late to invest in gold?
A. No. I believe everyone should have a core position of about 10% give or take. It’s not for making money but for survival.
Best Regards,
Southwest Ranch Financial, LLC (www.gleasonreport.com)
Tom Gleason, Manager & Researcher
Author of: How To Invest If You Can't Afford To Lose (Free download on the website)
Tom Gleason has degrees in finance and information systems. He's worked as a bullion dealer, fraud investigator, real estate appraiser and financial analyst.
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