Peter Schiff Forecasts An Inflationary Recession

Ben Bernanke, Vampire Chairman

Ben Bernanke, Vampire Chairman (Photo credit: DonkeyHotey)

September 7th column by Shiff

As far back as his time as an academic, Bernanke made clear that when the going got tough, he wouldn’t hesitate to fire up the printing presses. He specialized in studying the Great Depression and, contrary to greater minds like Murray Rothbard, determined that the problem was too little money printing. He went on to propose several ways the central bank could create inflation even when interest rates had been dropped to zero through large-scale asset purchases (LSAPs). Sure enough, the credit crunch of 2008 gave the Fed Chairman an opportunity to test his theory.

All told, the Fed spent $2.35 trillion on LSAPs, including $1.25 trillion in mortgage-backed securities, $900 billion in Treasury debt, and $200 billion of other debt from federal agencies. That means the Fed printed the equivalent of 15% of US GDP in a couple of years. That’s a lot of new dollars for the real economy to absorb, and a tremendous subsidy to the phony economy.

This has bought time for President Obama to enact an $800 billion stimulus program, an auto industry bailout, socialized medicine, and other economically damaging measures. In short, because of the Fed’s interventions, Obama got the time and money needed to push the US further down the road to a centrally planned economy. It is also now much more unlikely that Washington will be able to manage a controlled descent to lower standards of living. Instead, we’re going to head right off a fiscal cliff.

The Fed Chairman even admitted to this reality in his statement. Here are two choice quotes:

“As I noted, the Federal Reserve is limited by law mainly to the purchase of Treasury and agency securities. … Conceivably, if the Federal Reserve became too dominant a buyer in certain segments of these markets, trading among private agents could dry up, degrading liquidity and price discovery.” [emphasis added]

“…expansions of the balance sheet could reduce public confidence in the Fed’s ability to exit smoothly from its accommodative policies at the appropriate time. … such a reduction in confidence might increase the risk of a costly unanchoring of inflation expectations, leading in turn to financial and economic instability.” [emphasis added]

So we all agree that the prospect of inflationary depression was made worse by the Fed’s actions – but at least Ben Bernanke has pleased his boss. As a guaranteed monetary dove, Ben Bernanke appears to be a shoo-in if Obama is re-elected.

Meanwhile, Mitt Romney has pledged to fire Bernanke if elected. While I am not confident that Mr. Romney has the economic understanding to appoint a competent replacement – let alone pursue a policy of restoring the gold standard or legalizing competing currencies – he may well be seen as a threat not only to the Fed Chairman’s self-interest, but also to his inflationary agenda.

Given this background, let’s look at Bernanke’s quotes that have been the focus of media speculation for the past week: the US economy is “far from satisfactory,” unemployment is a “grave concern,” and the Fed “will provide additional policy accommodation as needed.” These comments seem designed to reassure markets (and Washington) that there will be no major shift toward austerity in the near future. The party can go on. But they also hint that Bernanke might be planning to double down again. I have long written that another round of quantitative easing is all but inevitable. It now seems to be imminent.

In reality, when the money drops may have more to do with politics than economics. The Fed may not want to appear to be directly interfering in the election by stimulating the economy this fall, but there are strong incentives for Bernanke to try to perk up the phony recovery before November and deliver the election to Obama. However, if Romney wins, Bernanke can at least fall back on his appeal as a team player as he lobbies for another term.

For gold and silver buyers, either scenario is likely to continue to stoke our market in the short- and medium-term. As the past week’s rally indicates, there is no longer a fear that the Fed has had enough of money-printing – in fact, it looks prepared for much more.

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Doug Kass : Plans On Shorting Stocks ( Response to Draghi / Euro Zone Crisis)

European Central Bank

European Central Bank (Photo credit: jurjen_nl)

Sept. 6

“I plan to sell/short this news for several basic reasons,” writes Doug Kass, President of Seabreeze Partners

In a new note published on The Street, Kass writes that he’s not very impressed by Mario Draghi‘s announcement that the ECB would begin unlimited bond-buying program.

“Not only is Europe slipping more rapidly into a deeper recession but the implementation of serious and effective longer-term policy responses remains unlikely. Band-Aid policy measures of providing liquidity (which aids the transmission of monetary policy) remain the operative palliative, and they will likely continue for some time to come.”

And he argues that the U.S. serves as a pretty good model for what’s to come:

“…we can look at the massive doses of monetary stimulation in the U.S. as a template. Despite unprecedented easing, we are now more than three years after the Great Recession of 2008-2009, and the domestic economic economy is growing (in real terms) at only 1.8%. Given the more dire state of the eurozone (accelerating inflation, decelerating economic growth and rising unemployment), how will it be possible for Europe to grow out of its debt problem? The answer is that it won’t be able to without the heavy lifting and unpopular policies that could encourage growth by cutting expenditures and balancing trade.”

Bottom line, he says: “There will be many more Thursdays with Mario.”

Read the whole post at TheStreet.com.

What Draghi said:

  • Transparency: Purchases to be revealed on a weekly and monthly basis.

Basically, so long as governments submit to outside observation of fiscal consolidation plans, the ECB will buy 1-3 year debt in unlimited levels.

You can read the full press release on it here.

If this really goes operational (which will require the full activation of the bailout schemes, and the willingness of countries like Spain to submit to outside review) the ECB then has the firepower to take tail risk off the table.

In fact, Draghi specifically said that was the goal: Taking tail risk off the table.

The big question is: how will this different than past bond buying programs? One reporter during the Q&A noted that the ECB has done this twice before.

Draghi’s basic answer: Countries will be subject to conditionality (making bond purchases part of fiscal consolidation) and it will be unlimited. Also it will be transparent.

The mos tension during the Q&A came when German reporters pestered Draghi about the legitimacy of the program, and whether this is really legal under the ECB’s mandate.

Draghi insists it is. He says that it’s consistent with the mandate for price stability and that even in the origanl ECB charter, bond purchases have been anticipated.
ECB press conference was the first time that the bank was expected to announce a real game changer for the euro crisis.

The reason? For the first time, it looks like the ECB is seriously going to open up its unlimited pocketbook and buy bonds agressively to depress yields.

Usually the ECB disappoints when it has a press conference, but this time the markets seem to like what happened. European bond yields are falling, and the Dow is up 130.

The hallmark news of the day was the existence of a new plan: The OMT, which stands for Outright Monetary Transactions.

Previously, when the ECB did bond buying it was under a program called the SMP: Securities Market Program.

The new plan rests on 5 pillars:

  • Conditionality. Strict and effective conditionality is attached to ECB purchases of sovereign debt. What this means is: No country gets to have their bonds purchased unless they submit to outside oversight on fiscal matters. IMF observation will get re-elected. Draghi threatens to terminate actions in non-compliance.
  • Unlimited purchases of 1 to 3 years.
  • ECB is no longer senior. ECB expects the same Pari Pasu treatment.
  • Sterilization: The liquidity created through outright transactions will be sterilized.
  • Transparency: Purchases to be revealed on a weekly and monthl
    • basis.

    Basically, so long as governments submit to outside observation of fiscal consolidation plans, the ECB will buy 1-3 year debt in unlimited levels.

    You can read the full press release on it here.

    If this really goes operational (which will require the full activation of the bailout schemes, and the willingness of countries like Spain to submit to outside review) the ECB then has the firepower to take tail risk off the table.

    In fact, Draghi specifically said that was the goal: Taking tail risk off the table.

    The big question is: how will this different than past bond buying programs? One reporter during the Q&A noted that the ECB has done this twice before.

    Draghi’s basic answer: Countries will be subject to conditionality (making bond purchases part of fiscal consolidation) and it will be unlimited. Also it will be transparent.

    The mos tension during the Q&A came when German reporters pestered Draghi about the legitimacy of the program, and whether this is really legal under the ECB’s mandate.

    Draghi insists it is. He says that it’s consistent with the mandate for price stability and that even in the origanl ECB charter, bond purchases have been anticipated.

    The market seems to like it: The Dow is surging 150 points, hitting the highest level in 52 weeks.

     

Damn Inflation And Run The Printing Press ; Part 5678

Fed. Res. Board:  P. Warburg, J.S. Williams, W...

Fed. Res. Board: P. Warburg, J.S. Williams, W.G. Harding, A.C. Miller, C.S. Hamlin, W.G. McAdoo, Fred. Delano (LOC) (Photo credit: The Library of Congress)

Septemeber 2

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Federal Reserve Bank of San Francisco President John Williams called for additional bond purchases by the Fed to spur economic growth that would be open- ended and total at least $600 billion.

High unemployment and inflation below the Fed’s 2 percent target “would argue for additional accommodation now,” Williams said today in an interview on Bloomberg Television from Jackson Hole, Wyoming. “I would like to see something that has a measurable effect on job growth. That would be arguing for a pretty large program” that’s “at least as large as QE2,” or the second round of quantitative easing, he said.

Federal Reserve Bank of San Francisco President John Williams called for additional bond purchases by the Fed to spur economic growth that would be open- ended and total at least $600 billion.

High unemployment and inflation below the Fed’s 2 percent target “would argue for additional accommodation now,” Williams said today in an interview on Bloomberg Television from Jackson Hole, Wyoming. “I would like to see something that has a measurable effect on job growth. That would be arguing for a pretty large program” that’s “at least as large as QE2,” or the second round of quantitative easing, he said.

Jonh Mauldin comments:

“No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future.”

– Ludwig von Mises

We heard from Bernanke today with his Jackson Hole speech. Not quite the fireworks of his speech ten years ago, but it does offer us a chance to contrast his thinking with that of another Federal Reserve official who just published a paper on the Dallas Federal Reserve website. Bernanke laid out the rationalization for his policy of ever more quantitative easing. But how effective is it? And are there unintended consequences we should be aware of? Why is it that the markets seem to positively salivate over the prospect of additional QE?

I missed the part where Congress gave the Fed a third mandate, to target the stock market. But Bernanke not only takes credit for the stock market, he points out that the rebound in the housing market is also due to Fed policy, because it fostered lower mortgage rates. Which it did. But let’s also remember that it was Fed policy that helped create the housing bubble to begin with. Which I don’t remember Bernanke taking credit for, even though he was on the Fed then and up to his eyeballs in supporting that policy.

Joan McCullough, in her own irreverent style, gave us a few must-read paragraphs this afternoon:

“And then [Bernanke] has the sand to make a public comment that stocks go up when he prints money because discount rates have gone down and the economic outlook has improved on account of it? This is what makes the hot dogs run stocks up the flagpole when The Bernank saddles up? Better economic outlook? Amazing.

Paul Ryan ,The GOP , The Fed and Inflation

In 1935, Cret designed the Seal of the Board o...

In 1935, Cret designed the Seal of the Board of Governors of the Federal Reserve System. (Photo credit: Wikipedia)

It’s time to put down Ayn Rand and pick up Milton Friedman
from The Atlantic
Paul Ryan is worried about the Federal Reserve. He is worried the Federal Reserve will try to bring unemployment down. There’s a word for this. I can’t print it, because this is a family publication.

For the past four years, Ryan has repeatedly warned about the real menace threatening the economy: inflation. Forget that long-term unemployment has surged to levels not seen since the Great Depression, and prices have barely risen — Ryan is scared of the inflation monster under his bed, and thinks you should be too. He thinks that trying to bring down unemployment will unleash the inflation monster — and that’s why he wrote an op-ed in the Wall Street Journal back in May of 2008 calling on Congress to revoke the Fed’s dual mandate to target both low inflation and low unemployment. He wants the Fed to only worry about the former and not the latter.
Ryan is pushing bad economics, and worse history. The chart below looks at core PCE inflation — the Fed’s preferred measure — since Congress passed the Humphrey-Hawkins Act in 1978 that gave the Fed its dual mandate. After spiking due to the second oil shock, inflation has been on a steady downward trajectory for the past 30 years.
  HHInflation.png

It takes a vivid imagination to interpret this as evidence that Humphrey-Hawkins has caused an inflation problem. Reality says the opposite. Actually, it’s much, much worse for Ryan — the Fed has gotten much, much better at maintaining price stability since the advent of the dual mandate. We don’t have data on core PCE inflation before 1959, but we do have numbers for CPI inflation — that is, including food and energy costs — going back to 1914. Which period looks like the nirvana of price stability to you in the chart below? (Note: the yellow dot shows when Humphrey-Hawkins became law).
CPIInflationMarker.png
There was 4.4 times more variance in prices before the dual mandate than after it. And those first 20 years came under the gold standard — which its advocates today claim would “cure” inflation! This last point is crucial because Ryan has something of a soft spot for goldbugs. Now, Ryan doesn’t want to bring back the gold standard itself, but he does want to create a commodity standard — in other words, tie the value of the dollar to a basket of commodities. This is a distinction without much of a difference. The Fed would have to raise interest rates when commodity prices go up, regardless of the state of the economy. This is all kinds of crazy. Commodity prices have shot up the past decade as developing nations have developed — unrelated to inflation here. It makes no sense to make our economy worse because China’s economy is getting better.
Where did Paul Ryan get such a truly nutty idea? It’s not from the hero of conservative economic thought, Milton Friedman. Republicans have abandoned Friedman — at least when it comes to monetary policy. (Although libertarians and conservatives like Scott Sumner, David Beckworth, and Evan Soltas still carry the Friedman torch). Friedman’s insight was that low interest rates don’t necessarily mean that Fed policy is easy — usually the reverse — and that the Great Depression wouldn’t have been quite so great if the Fed had printed money to prevent the banking collapse. Ryan hasn’t just ignored Friedman; Ryan is the anti-Friedman. He has sharply criticized Fed Chairman Ben Bernanke for printing money, and issued melodramatic (and incorrect) predictions about “currency debasement.”
Why is Ryan so out of step with what conservatives used to believe about monetary policy? Because he takes his cues on the Fed from a fiction writer instead of a Nobel laureate.
 

We are In A Global Recession: Only Time Can Heal the Economy, Says Gary Shilling

English: Representatives to the Conference on ...

English: Representatives to the Conference on Unemployment The meeting was called by U.S. President Warren G. Harding in response to the 1921 recession. (Photo credit: Wikipedia)

More than two years before the housing bubble burst in 2006, economist Gary Shilling warned that subprime loans were probably “the greatest financial problem” for the future U.S. economy. In 2007 he said “housing would sink the economy,” and a year after that he warned of a “serious recession” that would consume most of 2008. He was right every single time.

Now Shilling says a new recession has begun in the U.S. — in the second quarter — following on the heels of the recession in Europe. He says the current recession is different from previous ones because it wasn’t caused by rising rates or another housing downturn but rather a drop in consumer spending due to a weak job market.

“We’ve had three consecutive months of declines in retail sales,” says Shilling, president of A. Shilling & Co., an economic research and forecasting firm. “That’s happened 29 times since they started collecting the data in 1947, and in 27 of the 29 we were either in a recession or within three months of it.”

Shilling expects this recession will last about a year and shave about 3.5% from growth from peak to trough.

This time is different, says Shilling “because a lot of things that normally go down in a recession are already there, like housing.” And policies that normally help revive the economy are absent. The Fed can’t cut interest rates because they’re already near zero and the housing market won’t be a catalyst for growth, Shilling says.

One thing that hasn’t changed, says Shilling, is the economy as the number one issue in the presidential election. Before the last presidential election Shilling said that whoever got elected then wouldn’t get re-elected because the economy would still be weak with high unemployment.

Now Shilling says he’d like to see one party in control in Washington because it increases the odds of cuts for entitlements and could help “restore confidence in Washington.” But even then he says it will take five to seven years to complete the deleveraging that’s already underway before the economy recovers.

Flood of Foreclosures Could Cause Home Prices to Drop 20%

There is a consensus forming that the U.S. housing market may finally be on the rebound. Home prices are up 4-straight months, according to the latest S&P Case-Shiller index and Zillow’s U.S. home value index increased for the first time since 2007 in the second quarter.

But Gary Shilling of A. Gary Shilling is not convinced home prices have turned to the upside for good.

“The fundamental reason is there is a huge excess of inventory out there,” he tells The Daily Ticker’s Henry Blodget. “Some of it is listed but a lot of it is a so-called shadow inventory.”

Shadow inventory refers to homes in foreclosure and waiting to be sold or properties that homeowners have delayed selling, likely to get a better price.

In his latest Insights investment note, Shilling writes “excess housing inventories, the mortal enemy of prices, measure about 2 million over and above normal working levels. Thats huge considering that housing completions averaged about 1.5 million in earlier balmy years.”

He also cites the backlog of delinquencies and foreclosures that were put on hold during the robo-signing investigation and settlement process.

A CoreLogic report in June showed shadow inventory fell almost 15 percent from 2011 levels to 1.5 million properties. More than half of those 2.8 million homes were “seriously delinquent, in foreclosure or REO.”

“Since peaking at 2.1 million units in January 2010, the shadow inventory has fallen by 28 percent. The decline in the shadow inventory is a positive development because it removes some of the downward pressure on house prices,” said CoreLogic chief economist Mark Fleming. “This is one of the reasons why some markets that were formerly identified as deeply distressed, like Arizona, California and Nevada, are now experiencing price increases.”

As Shilling sees it, the banks have three options to get the bad mortgages off their books:

  1. Flood them onto the market
  2. Institute a mortgage modification plan
  3. Try to convert the properties into rentals

He says the second and third options are a lot less likely because mortgage modifications rarely work and rental properties are very difficult to maintain on a large scale, which may detract institutional inventors.

As a result, he believes the more likely scenario could very well end up being option number one, which would have a negative impact on home prices. The latest National Association of Realtors survey shows foreclosed properties tend to sell at a 19 percent discount to the market.

Too many foreclosures flooding the market at the same time could drive down prices of the surrounding homes.

“It would take a 22% house price drop to return to the long-run trend going back to 1890,” he writes in his research note. “Since corrections of bubbles often overshoot on the downside, our forecast of a further 20% decline may be conservative.”

Peter Schiff : Economy Has Sown The Seeds Of Its Own Destruction – Protect Yourself

Go Away Federal Reserve System!

Go Away Federal Reserve System! (Photo credit: r0b0r0b)

August 6

The past week provided clear lessons not just in how central bankers have a limited ability to positively influence the economy but also how they are limited in their capacity to deliver the shortsighted policy actions that investors currently crave. The developments should provide new reasons for investors and economy watchers to abandon their faith in central bankers as super heroes capable of saving the economy.

The employment report released on Friday confirmed that the U.S. economy is stagnating at best and actively deteriorating at worst. While the numbers of jobs created in July was actually better than many economists expected, it was still far below the levels that would indicate a growing economy.  But more important than the official unemployment rate (which ticked up to 8.3%) or the number of jobs created, is the number of people who have left the workforce out of frustration or despair. This number continues to head higher. The labor force participation rate, which is the percentage of healthy working age Americans who actually have jobs, is at one of the lowest points since women first started working en masse in the 1970’s.  It’s also instructive to add back into the unemployment rate those who want full time jobs but who have had to settle for part time work. This figure, reported under the “U6” category, currently stands at 15.0%. This is just a 12% decline from the 17.1% high seen December 2009.  In contrast the “official” (U3) unemployment figure has declined 17% from its peak.

In explaining these bad results, most economists simply look at the stimulating effects of monetary and fiscal policy,not at the problems that those measures create. As a result, it is assumed that not enough stimulation, in the form of quantitative easing or federal deficit spending has been applied to the economy. The next logical assumption is that if the measures of the past few years had not been applied, we would have seen much weaker results over that time. In other words, no matter how bad things are now, defenders of the status quo will always describe how bad things “could have been” if the Fed hadn’t stepped in. This counterfactual argument gets increasingly threadbare as the years wear on.

Rather than admit that its policies have failed, the Fed statement last week gave all indications that it will continue with its current inflationary policy to the bitter end. These are the same errors that inflated the stock and real estate bubbles and ultimately resulted in the 2008 financial crisis and our continuing economic malaise. Without any fresh ideas,Fed press releases have become a Groundhog Day repetition of the same pronouncements and diagnoses. Oddly, many market watchers are frustrated that the Fed has not telegraphed that more stimulus is forthcoming. While it should be obvious that our current “recovery” is dependent on monetary support, it should be equally plain that the Fed can’t actually admit that fragility without spooking markets. To be clear, QE III is coming, but the markets should not expect Bernanke to supply a precise timetable.

Without question, if the Fed had not stimulated the economy with zero percent interest rates, two rounds of quantitative easing and operation twist, the initial economic contraction would have been sharper.  But such short-term pain would have been constructive.   By not taking away the cheap-money punch bowl, the Fed has delayed the pain and prolonged the party. But to what end?  So far all we have received is a tepid phony recovery that has sown the seeds of its own destruction.

In contrast, real economic restructuring would have resulted if the Fed had withdrawn its monetary props.  This would have paved the way for a robust, sustainable recovery.  Instead, the Fed helped numb the pain with unprecedented (and apparently permanent) liquidity injections. Its actions merely exacerbate the underlying imbalances that lie at the root of our structural problems, and thus act as a barrier to a real recovery.  So long as the Fed fails to learn from its prior mistakes, the phony recovery it has concocted will continue to fade until we find ourselves in an even deeper recession thanthe one we experienced in 2008.

Those who believe that artificially low interest rates are needed now,fail to see the price that will be paid down the road.  By keeping rates too low, the Fed continues to lead an overly indebted economy deeper into the financial abyss.  However, its ability to maintain rates at such low levels is not without limits.  Just as real estate prices could not stay high forever, interest rates cannot stay low forever.  When rates finally rise, the extent of the economic damage will finally be revealed.

The sad fact is that no matter how impotent and dishonest Fed officials become, their elected rivals on Capitol Hill (who control the fiscal side of the equation) have become even less significant.  The complete lack of any political conviction to take steps to confront our fiscal imbalances means that Ben Bernanke and his cohorts are seen as the only cavalry capable of riding to the rescue.  But no matter how often they blow their bugles,our economy will continue to deteriorate until we stop waiting for a savior and instead fight the battle for prosperity ourselves.


500 pages of Investing Strategy and Selections – All You Need To Succeed

Posted: August 4, 2012 | Author: | Filed under: AMP Books and Seminars | Tags: , , , , , , , | 1 Comment »

Are Your Investing Results Mediocre ?

You can make the change :

Ask yourself the hard questions – what are my expectations/ results and what must I do to change if the results aren’t what you want.

You don’t have to have a 500 page plan like that outlined in my book – but no plan is a plan for no success ( pardon the lack of grammar ).

How many books on investing did you read this year ?

What are you doing differently from last year ?

Don’t remain in denial – face your demons and move up to success .

 

All You Need To Succeed –

in 500 pages of Investing Strategy

and Selections Available now at Amazon .com

Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today's stock market

 

Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today’s stock market [Paperback]

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Stock Investing As We Know It Will Soon Be Dead: PIMCO’s Bill Gross

English: Mohamed A. El-Erian, Managing Directo...

English: Mohamed A. El-Erian, Managing Director of the Pacific Investment Management Company, speaking at the World Economic Forum Summit on the Global Agenda 2008 in Dubai, United Arab Emirates. (Photo credit: Wikipedia)

Gross, the co-founder and co-chief investment officer of bond giant PIMCO, says it is time to write the obituary for stock investing as we know it.

Writing in his August investment letter, the manager of the world’s largest bond mutual fund said lower returns on stocks — and bonds, for that matter — means individuals will have to work longer to save for their retirements.

If financial assets no longer work for you at a rate far and above the rate of true wealth creation, then you must work longer for your money

“If financial assets no longer work for you at a rate far and above the rate of true wealth creation, then you must work longer for your money,” Gross wrote.

Gross, whose Pacific Investment Management Co has US$1.82-trillion in assets, took particular issue with the noted economist Jeremy Siegel, who popularized the notion that a portfolio of stocks can return on average 6.6% over the long haul.

“The Siegel constant of 6.6% real appreciation, therefore, is an historical freak, a mutation likely never to be seen again as far as we mortals are concerned,” he said.

Gross’ August investment letter is a bit reminiscent of BusinessWeek’s famous “Death of Equities” cover story, which appeared in 1979, just before the start of a big bull market.

Gross, whose firm launched its first actively-managed equity mutual fund in 2010 and has former Troubled Asset Relief Program leader Neel Kashkari as its head of global equities, said bonds are no salvation either.

In his April investment letter, Gross struck a similar tone on total return expectations. Gross then said investors should get used to smaller investment returns because of slower global growth and as the financial services industry continues to deleverage, or reduce its reliance on derivatives and borrowed money to generate higher returns.

This time around, Gross said at their currently low interest rates, investors should expect “mere survival” from their bond investments.“With long Treasuries currently yielding 2.55%, it is even more of a stretch to assume that long-term bonds – and the bond market – will replicate the performance of decades past,” he wrote.

In his August letter, Gross says the only “magic potion” monetary policymakers have to try and get higher returns for investors is through inflationary policies.

He said inflationary policies might work for bonds, but that they are bad for stocks. And over the long term, Gross said using inflation to solve retirement ills is not a real solution.

“Unfair though it may be, an investor should continue to expect an attempted inflationary solution in all almost all developed economies over the next few years and even decades,” Gross wrote. “The cult of equity may be dying, but the cult of inflation may have only just begun.”

“The problem with all of that of course is that inflation doesn’t create real wealth and it doesn’t fairly distribute its pain and benefits,” he continued.

Gross in June kept the proportion of U.S. government and Treasury debt in his US$263.4-billion Total Return Fund unchanged at 35% of assets, according to a report July 11 on the company’s website. Mortgages were at 52% for a second consecutive month. Pimco doesn’t comment directly on monthly changes in its portfolio holdings.

In developed nations, Gross has advised investors to favor debt of the U.K., as well as the U.S., as Germany faces risks related to the eventual costs required to end the region’s worsening sovereign and banking crisis.

The U.S. Treasury market is considered the cleanest “dirty shirts” for investors, Gross wrote in his previous commentary. “Don’t underweight Uncle Sam in a debt crisis. Money seeking a safe haven will find it in America’s deep and liquid, almost Aaa rated, bond and equity markets.”

Pimco’s Total Return Fund gained 7.3% during the past year, beating 73% of its peers, according to data compiled by Bloomberg.

WHICH IS WHY –  You need An Edge 

Are Your Investing Results Mediocre ?

Are you facing the facts ? – do you even know what your return was for the last six months ?

Do you have a written record of why you bought a particular stock , the time lines are results you expected , the review and   update of your selection(s) ?

Lack of a written plan gives you the ambiguity to mask your performance and avoid the responsibility for the results.

You can make the change :

Ask yourself the hard questions – what are my expectations/ results and what must I do to change if the results aren’t what you want.

It is true that you can’t control The Fed or the euro zone crisis – but you are the one who choses your portfolio – and to remain or change your selections each trading day.

You don’t have to have a 500 page plan like that outlined in my book – but no plan is a plan for no success ( pardon the lack of grammar.

How many books on investing did you read this year ?

What are you doing differently from last year ?

Don’t remain in denial – face your demons and move up to success .

Yes- I’d be happy to meet you and put on a one full day seminar.

The cost – $ 249 and the organizer receives his or her seat for organizing the event .

You can contact me direct by email to jackabass@gmail.com

All You Need To Succeed –

in 500 pages of Investing Strategy

and Selections

Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today's stock market

Available at http://www.amazon.com

Stock Market Magic: Building Your Apprentice Millionaire Portfolio 2012: All you need to succeed in today’s stock market [Paperback]

Jack A. Bass (Author)

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Doug Kass Tells Barrons His ‘Favorite Short For The Next Decade’

Barron's (newspaper)

Barron’s (newspaper) (Photo credit: Wikipedia)

This week’s issue of Barron’s has a great interview with Doug Kass, the legendary investor who famously predicted that stocks would bottom in March 2009 and that they would go nowhere in 2011

Among other things, Kass talks about what he’s short.  But one short stands out.  From Barrons:

Finally, my favorite short of the next decade is the U.S. bond market, for those that possess deep enough pockets, have the fortitude and the patience. I am long ProShares UltraShort 20+ Year Treasury [TBT], which is the inverse, double-short bond ETF. Over the past 2½ years, bonds have achieved a near 60% total return. A remarkable feature is the consistency of positive returns and the absence of many drawdown years of consequence. Nevertheless, they should be viewed as a return-free asset class that is very risky. The 10-year yields under 1.5%, less than half the yield during the recessions in 2001 and 2008. That means I am paying over 65 times earnings for a 10-year-bond, a rich price even by Amazon’s or LinkedIn’s standards.

This is a position he revealed during a big presentation at May’s Value Investing Conference in Omaha, Nebraska.  According to Market Folly, Kass identified seven key factors that could be “disruptive to the bond market”:

1) “the flight to safety premium erodes;”

2) “a muddle through economy might gain speed in the years ahead as domestic growth moves toward potential;”

3) “Federal Reserve policy is likely on hold—natural price discovery in fixed income;”

4) “inflation on the ascent;”

5) “housing is embarking on a durable multi-year recovery;”

6) “stocks versus bonds—the approaching reallocation trade;” and

7) “U.S. fiscal imbalances are not being addressed.”

In a series of charts and data tables, he demonstrates how these factors create a huge opportunity for investors willing to go against the grain.
Read more: http://www.businessinsider.com/doug-kass-barrons-favorite-short-for-the-next-decade-2012-7?op=1#ixzz21zsFtIJf

Should We Fear Another Depression ?

English: Various Euro bills.

English: Various Euro bills. (Photo credit: Wikipedia)

Here are the speaking notes – the outline – for my July 11 speech to a local Rotary Club

These are just notes to aid my speech.

There is a divergence between the U.S. economy and Europe – but  whereas the U.S. economy appeared to be recovering  as recently as five months ago more recent information indicates it is now slowing .

Europe continues to slide into depression or at least the calamity of a break up of the euro zone when Greece defaults and Spain appears to be faltering. The first stages of collapse are already front page news.

The cheering over the proposed  Euro Zone bailout – 100 billion euros with no clear amount or path to salvation is premature -

        If the loans go to the banks directly AND

        if that amount is enough Spain will be saved.

AND Spain was considerably more responsible than Greece in its fiscal and monetary policy. If a ” responsible ” government fails what will be the fate of Italy?

IF that 100 Billion goes to the Spanish Government – it is a burden it cannot repay.  Tonight Spanish miners are marching on Madrid to demand a 50,000 Euro subsidy per miner not be cut as part of an austerity package. Greeks do not understand why they should pay taxes  – or why they cannot continue to retire at age 55 .

The European community can pretend that Greece and Spain and Italy and Portugal will repay / be responsible / reign in overpayments and subsidies but the ordinary citizens now causing runs on the greek banks will be joined by the ” brothers” in Spain. everyone will try to get out the door at the same time. The Euro Emperor has no clothes.

The  The NY Times columnist Paul Krugman writes :

“Unthinkable as it seems, the logical conclusion is that the euro zone cannot continue to exist, at least in its present form. Markets, which hate unquantifiable uncertainty, are sensing this. We are likely to be in for an extended period of gut-wrenching turbulence.

What are the implications for the US, economically and politically? Direct links between the US and euro zone economies are fairly minor: we don’t export that much to them, they don’t import that much from us, and US banks have had an extended time to cut their exposure to euro zone risk. Yet the collateral damage could still prove significant.

When the stock markets fall, consumer and business confidence falls, leading to cutbacks in spending – bad news for an American economy that is still mired in recession. In addition, crisis in Europe makes for a stronger US dollar, as investors flee to safer abodes. Again, bad for the economy as a stronger dollars hurts US exports. “

David Rosenberg (  a fellow economist ) ,  in his morning note.

Here’s his list of  “cracks in the jobs market”

1) The jobless rate has topped 8% for 41 consecutive months, a post-World War record

2) Only half of the jobs lost in the recession have been regained. Normally at this stage of the cycle — even in the most acute jobless recoveries — employment would now be back to all time highs, says Rosenberg

3) More than one in four households have at least one member looking for a job – that’s another record

4) 5.4-million Americans who are still looking for a job have been out of work for more than year

5) More than 8-million Americans are working part-time because they can’t get a full-time job

6) Self-employment has risen 242,000 since March. “We are becoming a nation of freelancers and consultants in this era of corporate downsizing.”

7) More workers have signed up for federal disability benefits than new jobs have been created since the end of the recession in June 2009

 The number of people who have vanished from the work force altogether has surged 7.3 million over the past three years

9) The current labour force participation rate of 63.8% is below the rate at the end of the recession — a record low for a post-recession recovery

10) Household income is 5.3% lower now than it was when this “alleged” recovery began

11) Food stamps are surging to record levels, up 32% since 2009

Rosenberg’s conclusion?

“The labour market is broken and needs fixing — clarity over the fiscal policy outlook, a coherent energy policy and tax reform that provides incentives to save and invest as opposed to conspicuous consumption would be a good start.”

Germany might rescue the euro zone –  a weak euro helps German exports and  has made the German economy the envy of Europe and The U.S. with less than 5.5 %  unemployment. But German policy is fixated on the 1930’s – the terrible inflation of the Weimar republic when  the purchase  of a loaf of bread required a wheelbarrow of paper money . What Germany should recall is the May 1931 run on the Creditanstalt  – its collapse – merger with another bank  – that led to a crisis in Europe – knocked England off the gold standard and forced the U.S. Fed to raise interest rates.

Santayana  said ” Those that do not learn from history are condemned to repeat it.”

I’d add that it appears that all we learn from history is that we do not learn from history.

John Embry of Sprott Asset Management – Interview re: The Gold Standard and central banks

Description: Newspaper clipping USA, Woodrow W...

Description: Newspaper clipping USA, Woodrow Wilson signs creation of the Federal Reserve. Source: Date: 24 December 1913 (Photo credit: Wikipedia)

The Hera Research Newsletter is pleased to present the following insightful interview with John Embry, chief investment strategist of Sprott Asset Management LP, where he plays an instrumental role in the corporate and investment policy of the firm.  Mr. Embry, who is a world renowned expert on the gold market and on gold and precious metals mining shares, currently focuses on the Sprott Gold and Precious Minerals Fund.  Mr. Embry has researched the gold sector since 1963 and has more than thirty years of industry experience as a portfolio management specialist. 

HRN: (Is) the basic problem is too much debt and leverage? 

John Embry: The over the counter (OTC) derivatives situation is so surreal I can’t begin to express it.  Correctly calculated, the notional value of all OTC derivatives is in excess of one quadrillion dollars globally.  The vast majority are related to interest rates. Central banks have to keep creating liquidity to prevent these instruments from collapsing. 

HRN: What can the Federal Reserve and other central banks do?

 John Embry: They’re lost either way. They’re running a massive lab experiment with monetary policy and don’t have a clue what the outcome is going to be. 

HRN: Do you think the U.S. economy can grow its way out of debt? 

John Embry: When I was a kid back in the 1950’s, most women didn’t work. Americans maintained their standard of living by putting a second person to work.  When that was expended they made up the difference by going into debt and, eventually, they used their homes as cash machines.  Now student loans total more than $1 trillion. I just don’t see where the consumer demand is going to come from going forward.  You can’t get blood out of a stone. 

HRN: What do you think the outcome is going be? 

John Embry: I believe that before this is over we’ll have a new currency system, probably backed by gold. 

HRN: Do you support the gold standard?

HRN: But the gold standard doesn’t prevent financial panics.

 John Embry: There are always going to be financial panics, but, under the gold standard they tend to be short term.  If we had had a gold standard, there would have been a number of cleansing periods where excess debt was eliminated.  The Federal Reserve allowed the build up of debt that led to the stock market bubble and crash of 1929 and to the Great Depression, which was followed by World War II.  It took about a decade to build up the debt and more than a decade to deal with the fallout.  It’s taken more than 40 years to build up the debt we have today and I don’t know how long it’s going to take to correct it.

 HRN: What does this mean for the average person? 

John Embry: I think living standards of most people in the world, particularly in the West are going to decline precipitously.  The Federal Reserve recently reported that the net worth of the median American family has fallen nearly 40% since 2007 after adjusting for inflation.  Before this all plays out, I think the percentages are going to be far larger.

HRN: Do you foresee any wider impact on society? 

John Embry: When I was growing up in the United States after World War II, I didn’t realize how remarkably fortunate we were as a society to have such a strong middle class.  Seldom in history has there been a middle class to equal what transpired in the U.S. and Canada from the 1950s to the 1980s.  We basically took it for granted because that’s all we ever knew.  The middle class in the United States is disappearing.  What happens is that you have massive poverty and a small wealthy class.  It’s one of the worst things that can happen to a society and it can lead to civil unrest.  If there’s no reason to buy into the system, people will act up. 

HRN: Do you view gold and silver as commodities? 

John Embry: I view gold and silver as monetary metals.  The mainstream news media conflates gold and silver with industrial commodities, but they’re really a competitor to the currency system.  Gold is the antithesis of paper money. 

HRN: I’ve read that central banks are buying gold

John Embry: Confidence in currencies is misplaced.  There is a strong flow of gold from West to East.  The Chinese, Indians, Russians and Vietnamese know perfectly well what’s going on with the US dollar and the Euro.  They are buying physical gold and the West has been stupid enough to sell it to them. 

HRN: What’s your view on China? 

John Embry: I’m not optimistic on China in the short run.  The People’s Bank of China (PBoC) recently cut bank reserve requirements by 150 basis points to stimulate 1.2 trillion yuan ($190 billion) of new lending because they don’t want growth to fall from around 8% to 7%.  As I see it, they’ve dined out on Western profligacy for 20 years and have become the most unbalanced economy in the world.  An inordinate amount of China’s economic activity is generated by exports and by all manner of capital spending on manufacturing, real estate, infrastructure and more.  The slowdown in the world economy has revealed massive overcapacity in many sectors. 

HRN: Can China develop a consumer-driven economy? 

John Embry: The idea that China’s economy can morph into a consumer-driven economy is preposterous.  The very same consumers are employed in sectors like manufacturing where there is massive overcapacity.  If the world slides into another global recession, which is not beyond the realm of possibility, I don’t see how China stays out of it and if they don’t then there’s no engine of growth left in the world. 

HRN: So, even with a rising middle class, China remains dependent on exports? 

John Embry: The fact is that China has become the world’s manufacturer but the ability of their two largest customers, Europe and the United States, to consume is being constrained.  China is not going to be able to keep selling more year over year.  The HSBC manufacturing index has fallen to recessionary levels. 

HRN: It has been predicted that China will become the world’s largest economy.  Do you think that’s true? 

John Embry: I think China will probably dominate the 21st century.  The U.S. dominated the 20th century but it went through some very tough times in the first half of the century. 

HRN: With a slowdown in China, what’s your view on commodities like copper or crude oil? 

John Embry: In the short term, I’m worried about commodities.  In a deep global recession, I expect there will be extreme monetary debasement, which will hold up the nominal prices of commodities more than supply and demand factors would suggest. 

HRN: Do you foresee a bear market in commodities? 

John Embry: We are in a short-term bear market that will be arrested by monetary debasement. 

John Embry: The only things I’m comfortable holding are precious metals and, because they are so cheap now, precious metals mining shares. 

HRN: Where do you think the price of gold will end up? 

John Embry: I’m more concerned with how many ounces I own than with how many U.S. dollars I can get for them at any given point in time.  Gold and paper money are going in opposite directions

 John Embry: One of the greatest periods of wealth creation was when we had a gold standard in the second half of the 19th century.  It’s hard to believe that it’s going to be 41 years since there has been gold backing for any of the major currencies in the world.  That is what has allowed the massive build up of debt that we have today.  If there had been a gold standard, we wouldn’t be in the position we are in.  Western governments don’t want the gold standard because it restricts their ability to dole out favors.

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