Friday, July 31, 2009

Falling Dollar; Rising Gold and Silver


The dollar index fell over 1% today.

The US Dollar fell below a key resistance level today.

Gold up over 2% to over $955/oz. today!

...and silver is up over 3% today, nearing $14/oz.!

My thesis on inflation may just be turning out as expected.

Stay tuned...

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Government Spending Helps Inflate the Latest GDP Number

According to the Department of Commerce Report the economy only contracted at a 1% annual rate in the second quarter. This is an improvement from a contraction of 6.4% in the first quarter of this year. Most of the improvement in the second quarter GDP over the first quarter is due to growth in government spending and not because of an actual improvement in the real economy.

According to the GDP report:
1. Durable Goods decreased 7.1%
2. Nondurable Goods decreased 2.5%
3. All Goods decreased 4.0%
4. Gross private domestic investment decreased a whopping 20.4%
5. Exports decreased 7.0%
6. Imports decreased 15.1%

In other words the private economy is still contracting very fast.

Government spending is growing very quickly. According to the second quarter GDP report:
1. Federal Government Spending increased 10.9%
2. Defense Spending increased a whopping 13.3%
3. Nondefense Spending increased 6.0%

Also, first quarter GDP was revised downward and consumer spending shrank at a higher than expected pace. According to Yahoo Finance :
"...the Commerce Department revised the first-quarter GDP figure much lower, saying economic activity tumbled 6.4 percent. That is the worst quarterly reading in nearly 30 years.

The latest report also said consumers cut spending by 1.2 percent in the second quarter, after a 0.6 percent increase in the first quarter."

Bottom line: The private economy is still doing very poorly.

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Economy Continues To Contract in 2nd Quarter

According to reports GDP shrank at a 1% annual rate in the second quarter. According to Barry Ritholtz a better estimate would be that the economy shrunk at a 2.38% annual rate.

Also, first quarter GDP was revised downward and consumer spending shrank at a higher than expected pace. According to Yahoo Finance :
"...the Commerce Department revised the first-quarter GDP figure much lower, saying economic activity tumbled 6.4 percent. That is the worst quarterly reading in nearly 30 years.

The latest report also said consumers cut spending by 1.2 percent in the second quarter, after a 0.6 percent increase in the first quarter."

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Thursday, July 30, 2009

Be Back Tomorrow

I've been away on vacation. I post some things tomorrow.

Thursday, July 9, 2009

Brown Manure, Not Green Shots


Economist Nouriel Roubini sees unemployment rising to close to 11% by the end of the year and that this will have a knock-on effect for the rest of the economy. He also says that job losses are even worse than what's being reported.

He also had this to say about the housing market:
It's already estimated that by the end of this year, there will be about 8.4 million people with a mortgage who have lost jobs, and therefore have little income. Therefore, the number of people who will have difficulties servicing their mortgages is going to rise very sharply.

Home prices have already fallen from their peak by about 30%. Based on my analysis, they are going to fall by at least 40% from their peak, and more likely 45%, before they bottom out. They are still falling at an annualized rate of over 18%. That fall of at least 40%-45% percent of home prices from their peak is going to imply that about half of all households that have a mortgage--about 25 million of the 51 million that have mortgages--are going to be underwater with negative equity and will have a significant incentive to walk away from their homes.

He had this to say on the budget deficits:
...deflationary pressures are going to be dominant this year and next year.

But eventually, large budget deficits and their monetization are going to lead--toward the end of next year and in 2011--to an increase in expected inflation that may lead to a further increase in 10-year treasuries and other long-term government bond yields, and thus mortgage and private-market rates. Together with higher oil prices driven up by this wall of liquidity rather than fundamentals alone, this could be the double whammy that could push the economy into a double-dip or W-shaped recession by late 2010 or 2011.

Read the whole article here.

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Wednesday, July 8, 2009

Goldman Sachs

There are allegations flying around the internet about Goldman Sachs. If these allegations are true it means, bottom-line, that Goldman Sachs may have robbed market participants of billions of dollars. This definately needs to be looked into by the FBI and SEC. I don’t have time to explain all these allegations in plain English.

You can read about it at:

Karl Denninger's excellent Blog

Daily Kos

and Zero Hedge Blog

If you are trading in the market beware...

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Tuesday, July 7, 2009

Obama's Poll Numbers Are Taking a Beating in Ohio


According to the latest Quinnipiac poll Obama now has a 49% approval rating in Ohio and 44% disapproval rating. This is down from a 62% approval and 31% disapproval in May.

Ohio is a very important swing state that Obama won by 51.5% of the vote to McCain's 46.9% of the vote. In the last election Ohio had 20 electoral votes of the 270 needed to win the presidency.

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Jim Rogers Plans to Short U.S. Treasuries

According to Bloomberg's Bob Chen:
The dollar and U.S. Treasuries are both likely to slide as soaring government debt in the world’s biggest economy undermines confidence in its assets, according to Jim Rogers, chairman of Rogers Holdings.

“The government is printing lots of money and borrowing even more; that’s not the basis for a sound currency,” he said in a telephone interview today from Singapore. “The idea that anybody would lend money to the U.S. government for 30 years at 3 or 4 or 5 or 6 percent interest is mind-boggling to me.”

Rogers, the author of books including “Investment Biker” and “Adventure Capitalist”, said he holds fewer dollars than a year ago and plans to “short U.S. government bonds someday.” A short bet involves selling a security you don’t own with a view to buying it back after the price has fallen.

Read the whole story here.

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Monday, July 6, 2009

U.S. lurching towards 'debt explosion'

According to Philip Aldrick of the Telegraph:

The US economy is lurching towards crisis with long-term interest rates on course to double, crippling the country’s ability to pay its debts and potentially plunging it into another recession, according to a study by the US’s own central bank.

In a 2003 paper, Thomas Laubach, the US Federal Reserve’s senior economist, calculated the impact on long-term interest rates of rising fiscal deficits and soaring national debt. Applying his assumptions to the recent spike in the US fiscal deficit and national debt, long-term interests rates will double from their current 3.5pc.
...

Should the cost of raising or refinancing public debt in the markets double, “the debt could just explode”, he said, adding that it would come to a head in “five to 10 years”.

Read the whole article here.

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Friday, July 3, 2009

America Though The Eyes of an Englishman

Daniel Hannan speaking in Denver, Co this week.


and here:



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Wednesday, July 1, 2009

German Court Suspends Ratification of the Lisbon Treaty

The German Constitutional Court suspended the ratification of the Lisbon Treaty. This is great news. The Lisbon treaty must be ratified by all EU member countries to go into effect. The Lisbon treaty does nothing more than to centralize more power in the hands of thuggish, undemocratic, technocrats in Brussels.

Good article on Daniel Hannan's blog today on the move by the German Constitutional Court.

Go Daniel Hannan, Václav Klaus, and Nigel Farage! Referendum! (See Below)



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Will We See Inflation, Deflation, or Hyperinflation In The Future?


Some people have argued that the United States is going to face a long period of deflation, such as occurred in Japan in the 1990s. Others argue that we will see high rates of inflation like we did in the 1970s. Still others argue that we will see hyperinflation (i.e. an increase in the prices of goods of over 50% per month) such as what happened in the Weimer Republic in the 1930s. So who is right? I think the most likely scenario is that within the next few years we will see inflation rates in the high single digits to low double digits, about 6% to 14% per year.

The rate of inflation is determined largely by three things: the overall supply of money, the velocity of money (i.e. the rate at which the money circulates in the economy), and the supply of goods. All other things being equal, the greater the money supply the greater inflation; all other things being equal, the greater the velocity of money the greater inflation; all other things being equal, the fewer goods the greater inflation. For more information about this read here.

One reason I think we will see high inflation within the next 2-3 years is that the Federal Reserve has been greatly increasing the money supply. According to their latest report M1 money supply has increased 16.2% over the last 12 months and M2 money supply has increased 9.0% over the same period. Unfortunately the Federal Reserve no longer publishes the broadest measure of the money supply, M3. One can only estimate this number. The estimates I have seen have M3 increasing at about a 7% rate.

People who think we will see a debt-deflationary spiral argue essentially that the velocity of money will continue to slow down and that the money supply will contract due to a decrease in banks issuing credit and giving out loans. The velocity of money is really the X-factor that is hard to predict. People who see deflation in our future argue that people are saving more, banks are not lending, and the credit is contracting. This will continue in the future and will cause the velocity of money to slow further. Because of these factors, I think inflation will remain low over the next 3-6 months. However, I think we are already seeing signs of inflation picking up.

Both the CPI (consumer price index) and PPI (producer price index) have gone from negative to positive in recent months. See graph below:


The people who think hyperinflation is coming argue that the huge budget deficits that the federal government is running will force the Federal Reserve to monetize some of the debt because the government will eventually not be able to sell bonds at reasonable interest rates. This monetization will continue leading to inflation. This inflation will cause foreigners to sell their dollars eventually leading to a complete collapse of the US dollar. This is the doomsday scenario and something to keep in mind.

I think, however, there is only a low probably of this happening within the next few years because US debt levels have not yet reached critical levels. During WWII government debt was at 125% of GDP today it is at about 80% but is raising very quickly (see below). We could get to that point one day though.


Once again I think over the next 3-6 months we will see very low inflation. However, within the next 2-3 years I think we will see moderate to high inflation primarily because the Fed is greatly expanding the money supply and leaving interest rates at basically 0%. I am open to the data as it comes in and will change my position accordingly. That is why it is good to know the hyperinflationary and deflationary scenarios in case evidence comes in supporting those scenarios. If it does you can be ready and not surprised.

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Schiff vs. Dodd

Peter Schiff has been considering a run for the Senate against incumbent Democratic senator Chris Dodd. A recent poll came out showing Schiff is very competitive against Dodd.

According to The Hill,
Economist Peter Schiff is looking closely at joining the GOP primary to face Sen. Chris Dodd (D-Conn.), and his polling shows he would be competitive in the general election.

The polling, which was conducted by Wilson Research Strategies and obtained by The Backroom, shows Dodd leading the little-known Schiff within the margin of error, 42-38.
...
Schiff is a libertarian-leaning former Ron Paul adviser who made a name for himself by predicting the economic recession. He has made it clear that he’s leaning toward a run and could bring significant personal resources to the race.


Here is Peter Schiff recently on the Daily Show:
The Daily Show With Jon StewartMon - Thurs 11p / 10c
Peter Schiff
thedailyshow.com
Daily Show
Full Episodes
Political HumorJason Jones in Iran

I would love to see Schiff and Dodd debate. I think if Schiff runs there is a very good chance he could win.

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