Serial Irresponsibility

Every body knows what a serial killer is.  A psychopath who routinely kills and maims without remorse.  Well now we can add good old Uncle Sam (and the US politicians and central bankers) to this list as he works overtime to murder the United States Economy, financial and monetary system.  We are well on our way to the German Reichsbank, and the Weimar republic.  The world is gagging on dollars, and everyday a new wheelbarrow full hits their bank accounts.  It is just a matter of time till the world as the citizens of the United States ceases to exist.  There is no limit to the money and credit creation.  As everybody knows the US Federal reserve quit publishing the M3 number in March.  And have been up to no good since then.  Over 450 billion dollars has been created in M2, and according to studies by Adrian Van Eck M3 tracks M2 by about a ratio of 150%.  They are well on their way to printing and credit creation of 1 Trillion dollars on a year over year basis.

Just this week the Russian and Swiss central banks lightened up on their dollar reserves, but this is just the beginning.  As reported by Richard Russell “The figures are mind-blowing. As of this October, foreign investors owned almost 43% of all US marketable treasuries, 32.7% of all outstanding US corporate bonds, and just over 16% of all US equities. And the numbers keep continuing to climb.

With foreigners owning so much in US Treasury and corporate paper, you know that our creditors are keeping a watchful eye on the US dollar. And why wouldn't they? After all, foreigners own upwards of $4 trillion in assorted US assets.”.  Not including their cash holdings, and the value of those dollars have nowhere to go but down.  If they see a dive begin you can expect the following to unfold.

I believe you will see very soon runaway asset appreciation as these dollars seek refuge anywhere but in the dollar. They will buy stocks, commodities, real estate, and gold, anything that can’t be printed.  They will buy other foreign currency denominated assets, but that is a fool’s game as all the G8 countries bankers and politicians are closely following in the footsteps of the US.  Currency and credit creation are out of control worldwide as the western industrialized countries try to outrun their welfare and regulatory state expenses.  By spending now and passing the bills to their children.  Never in history has this been done, and before it is over the children will revolt in generational warfare.  And renege on past politicians promises.  Responsible politicians are going the way of the DODO bird, in the elections unfolding In the United States and abroad, talk of restraining government spending, handouts and individual responsibility is a quick ticket out of office.  Bread and circuses for everybody as they said in ancient Rome.  These ignorant voters and populous politicians never learned the first lesson in Econ 101, which is; TANSTAAFL which is an acronym for “there ain’t no such thing as a free lunch.  The very thing they are demanding from their governments is a stealth theft of their purchasing power and savings, as the next dollar or Euro or British pound or yen is rolled off the printing press, and their fractional banking systems create money out of thin air.  They are going to do it until we all go down the tubes.

What a Taxing Day

This was sent to me by several people on the Internet, and it is sooo true, and it extends to every Welfare State in the World, the European union, Japan, UK, United States, taxes are high and rising.  The German Value added tax is going up 3% in January, in an economy that is growing less than 2% a year, with the hoax that is “global warming” environmental taxes are set to explode.  Global warming has happened many times over the last 10,000 years and of course there were no cars, or big populations to cause it then, just as humans are not the cause of it today, warming and cooling cycles have happened since time began on earth and are a feature in nature.  Taxes are necessary for the common good such as roads, courts, schools, and utility generation.  Common needs that need to be spread across many people to create economies of scale, and ubiquitous availability.  But now it has gone to far and is destroying the fabric of Modern Society. Here some of the ugly truth about where the welfare states have gone;

Tax his land, Tax his bed,

Tax the table at which he's fed. 

Tax his tractor, Tax his mule,

Teach him taxes are the rule.

Tax his cow, Tax his goat,

Tax his pants, Tax his coat.

Tax his ties, Tax his shirt,

Tax his work, Tax his dirt.

Tax his tobacco, Tax his drink,

Tax him if he Tries to think.

Tax his cigars, Tax his beers,

If he cries, then Tax his tears.

Tax his car,

Tax his gas,

Find other ways to tax his ass

Tax all he has

Then let him know

That you won't be done

Till he has no dough.

When he screams and hollers,

Then tax him some more,

Tax him till

He's good and sore.

Then tax his coffin,

Tax his grave,

Tax the sod in

Which he's laid.

Put these words

Upon his tomb,

Taxes drove me to my doom.

When he's gone,

Do not relax,

Its time to apply

The inheritance tax.

Here’s just a few more taxes to think about;

 Accounts Receivable Tax

 Building Permit Tax

 CDL license Tax

 Cigarette Tax

 Corporate Income Tax

 Dog License Tax

 Federal Income Tax

 Federal Unemployment Tax (FUTA)

 Fishing License Tax

 Food License Tax,

 Fuel permit tax

 Gasoline Tax (42 cents per gallon)

 Hunting License Tax

 Inheritance Tax

 Interest expense Inventory tax

 IRS Interest Charges

 IRS Penalties (tax on top of tax)

 Liquor Tax

 Luxury Tax

 Marriage License Tax

 Medicare Tax

 Property Tax

 Real Estate Tax

 Service charge taxes

 Social Security Tax

 Road usage taxes

 Sales Tax

 Recreational Vehicle Tax

 School Tax

 State Income Tax

 State Unemployment Tax (SUTA)

 Telephone federal excise tax

 Telephone federal universal service fee tax

 Telephone federal, state and local surcharge taxes

 Telephone minimum usage surcharge tax

 Telephone recurring and non-recurring charges tax

 Telephone state and local tax

 Telephone usage charge tax

 Utility Taxes

 Vehicle License Registration Tax

 Vehicle Sales Tax

 Watercraft registration Tax

 Well Permit Tax

 Workers Compensation Tax 

To mention just a few of the myriad taxes out there.

 COMMENTS: Not one of these taxes existed 100 years ago, and our nation was the most prosperous in the world. We had absolutely no national debt, had the largest middle class in the world, and Mom stayed home to raise the kids.

Governments worldwide are now nothing more than mafia’s, leviathan welfare states extorting more and more out of anything that moves.  FOR THE COMMON GOOD.  What a laugh, power is all they crave, absolute power corrupts absolutely.  And they are corrupt, rent seeking politicians.  Paying off campaign supporters, and ignorant voters who believe in something for nothing and the tooth fairy.

Stocks, Gold and Federal Reserve analysis by Garrett Jones

        “The Great Dilemma”

October 31, 2006

     SPECIAL ALERT

“The Great Dilemma”

“The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown.”
H. P. Lovecraft

October 31, 2006

All the elements are in place for Halloween with threats of terrorism and Persian Gulf oil complex attacks; a ‘scary’ election looming and a large naval deployment suggesting some type of potential engagement in the Middle East.   Various intelligence sources suggest that dozens of ships of various nationalities are joined in the process of several 'exercises' spanning the Indian Ocean, Red Sea, Arabian Sea, Persian Gulf, and the Mediterranean.  The reason for this deployment runs the gamut from protection of Saudi oil fields to pressuring Iran to ‘shape up’.  As the above quote says, the oldest and strongest kind of fear is fear of the unknown.

The Great Dilemma is that fear and the unknown usually don’t translate into new highs. This market has climbed a ‘wall of worry’ like no other market in memory.  The Great Dilemma can be translated into a couple of simple questions -- “With all of the major negatives in our economy, why is the stock market going up?” and “How the heck do you play this market?”  Those two questions seem to be the most basic questions facing traders and investors today. Astute investors are well aware of all of the negatives and also have enough experience to avoid a market that is short term overbought.  That is part of the dilemma.  The reason is simple: this has been a classic market where ignorance is bliss.  Simply put; those investors who don’t have the experience and knowledge of past market history obviously haven’t let it get in their way and have enjoyed a market that has relentlessly advanced.

The old negatives of debt, deficits, war, terrorism, derivatives crisis, etc. have become passé.  It is like the little boy who cried wolf – after a period of time, no one listens.  The market has even added some rather clever new negatives such as a dire warning from the Chief Accountant of the Government Accountability Office.  David M. Walker is the comptroller general of the United States i.e. the country’s top accountant.  Essentially, Walker will talk to anyone who listens about the fiscal black hole Washington has dug itself, the "demographic tsunami" that will come when the baby boom generation begins retiring and the recklessness of borrowing money from foreign lenders to pay for the operation of the U.S. government. One would think that such warnings from the nation’s top accountant would shock people out of complacency, but, of course, it doesn’t. 

We have a spending addiction in this country and addictions aren’t easily overcome.  Addictive personalities and clear logical thinking do not go together.  Credit cards are a way of life in America.  In fact, mass quantities of credit cards are a status symbol in some circles.  There is no question that addictions have to be fed in order to survive and it is very clear that America doesn’t have to worry about going to rehab anytime soon.  Uncle Ben Bernanke is feeding our addiction in a big way …. and, at this late stage of the cycle, maybe we should all be glad that he is.

As our country has allowed itself to increasingly chip away at its financial soundness, we notice that the Federal Reserve is also manifesting some changes in its actions. For decades, the Federal Reserve has set targets for money supply growth and has published data on the money supply.  In July 2000, the Federal Reserve announced it was no longer setting target ranges for money supply growth.  In March of this year, the Board of Governors ceased publishing the M3 monetary aggregate.

The public and private sector analysts as well as the Federal Reserve have long monitored the growth of money supply because it has always been believed to be the primary element in controlling real economic activity and inflation.  The Fed is expected to maintain high employment, price stability and economic growth via its adjusting of the money supply.  The Federal Reserve itself has stated that this relationship between the growth of money supply and the performance of the US economy has waned over the past couple of decades.

Reviewing the components of Money Supply, we note that the Fed publishes weekly and monthly data on M1 and M2.  Money supply is the total of all electronic credit-based deposit balances in bank (and other financial) accounts plus all the minted coins and printed paper. So, let’s review the components of the Money Supply:

·         M0 = The total of all physical currency plus accounts at the central bank that can be exchanged for currency.

·         M1 = M0 + the amount in demand accounts (checking accounts).

·         M2 = M1 + most savings accounts, money market accounts, and certificate of deposit accounts (CDs) of less than $100,000.

·         M3 = M2 + all other CDs, deposits of Eurodollars and repurchase agreements.

These money supply measures reflect the different degrees of liquidity or spendability that different types of money have.  The chart below shows the relative size of the two monetary aggregates.  As of June 2006, M1 was approximately $1.4 trillion with over half being currency. M2 was approximately $6.8 trillion and mostly consisted of savings accounts.

A dilemma for the Fed occurred when NOW accounts were introduced in 1981.  The relationship between M1 growth and measures of economic activity such as Gross Domestic Product (GDP) broke down. Depositors moved funds from savings accounts, which are included in M2 but not in M1, into NOW accounts, which are part of M1.  As a result, M1 growth exceeded the Fed’s target range in 1982, even though the economy experienced a severe recession.  The Fed de-emphasized M1 as a guide for monetary policy in late 1982.  It stopped announcing growth ranges for M1 in 1987.

By the early 1990s, the relationship between M2 growth and the performance of the economy also had weakened. Interest rates had been declining since November of 1981 and were at their lowest level in decades.  This motivated savers to move funds out of savings and time deposits (part of M2) into the stock and bond mutual funds – which are not included in any of the money supply measures. These activities have led to the historical relationships between money and income and between money and price level to break down.  The result is that these aggregates have become less useful to the Fed in setting policy.

In late 1999, there was a big buildup of cash in the hands of the public due to its fear of Y2K related problems.  This dissipated early into 2000 when there was no problem.  Clearly, the Fed had more control over the economy via its adjustments of the monetary aggregates in the past.  That realization no doubt led the Fed to ceasing to publish M3 data.  The point is we have a lot of dilemmas occurring in a lot of very important areas.  Another super important dilemma is how we will continue to attract foreign money to finance our debt and fund our government.  If we continue to create money as if it were just paper and backed by nothing (Oh, my goodness, that’s what it is!) surely foreign investors will be less motivated to purchase our debt.  If that happens (“when” that happens is the correct comment), rates on debt will have to be raised to attract buyers.  Higher rates with further impact the economy and the already impacted housing market.  On the other hand, contracting the money supply to increase the value of the US dollar creates “tight money” and chokes any expansion in the economy.  So, as you can see, “The Great Dilemma” is really a family of major dilemmas.

What is interesting is that virtually all of these stellar dilemmas are being ignored.  We call it complacency.  Let’s see if we can put our finger on the reason.  With M3 money supply activity being kept secret, the Fed has been able to create a lot of money. In the past 8 months, the Fed had created a $200 billion expansion in M2– an annual rate of $300 billion. One analyst noted the historic relationship between M2 and M3 was that M3 was consistently about 50% larger than M2.  That means the 12 month expansion rate for M3 is about $450 billion – that is a LOT of money. In fact, it is about ten times as much money as US big business will invest in China this year.  This is just less than one half of a trillion dollars being injected into the US economy.  Money is not and will not be tight. 

The typical business/economic cycle is such that you go from inflation to disinflation to deflation.  More specifically, you go from mild inflation to robust inflation and finally to runaway inflation.  That part of the cycle peaked in January of 1980.  You couldn’t expand the money supply during the runaway inflation period because it would have been like throwing kerosene on a fire.  Disinflations and deflations are different.  They can absorb vast amounts of money.  It is fairly clear to most analysts that the natural evolution of the cycle would have us in a period of deflation if it weren’t for the Fed making so much money and credit available.  Bernanke is well aware that the most dreaded economic environment is a deflation.  He has shown that he will throw as much money as it takes to avoid deflation.

That is the realization – the Fed will do whatever it has to do to avoid deflation.  In addition, we are at the mid point of a presidential cycle – that means the Administration will do everything in its power to keep the economy rolling along.  The last two years of a presidency have a remarkable record with respect to the stock market.  So, regardless of how bad things may look, the odds favor the market going up barring any unforeseen events.  As long as my long term indicator does not turn down and cross the line, then we should have our bias to the upside.  Nonetheless, we are seriously overextended – so extreme caution is advised. 

This market has three short term things going for it – one ends today.  That is the institutional fiscal year end. Institutions have been window dressing their portfolios leading into their fiscal year end. They may be willing to take some funds off the table once it is over.  We also have the monthly seasonality in a favorable mode during this week.  Institutions tend to buy at the end of a month and in the early days of the new month.  Finally, we have the election coming up in one week.  It is reasonable to believe that the market will sell off after the election regardless of the outcome.  Assuming that it holds up after the election, the next major hurdle for the market is getting past mid month.  I’m definitely expecting a correction this month and I am expecting divergences to appear.  So far, there is no sell signal and few divergences – I expect that will change as the election approaches and passes.

GOLD

In my view, Bernanke is the key to what will happen with gold, as well.  Paul Volcker was a great combatant to gold where it appears that Bernanke is the best thing that ever happened to gold.  That may be the case, but in my view, I wouldn’t be too quick to make that judgment.  Some years ago, Bernanke gave a speech on deflation suggesting it was no longer necessary to print money in order to get it into circulation.  He said it could be done by simply striking computer keys.  Most gold bugs assume Bernanke will go on a mad spree of creating money – and it appears that he has.  I will also point out that he is a highly educated man and probably has no intention of going down in history as the Fed Chairman who ushered in the next Great Depression. In fact, in a more recent speech, Bernanke said “The Fed should take most seriously - as of course it does - its responsibility to ensure financial stability in the economy.”  I have no idea, but I believe he really does take that responsibility seriously. 

In the meantime, gold bottomed almost precisely in the expected range and has now broken out to the upside.  It has a very clear inverted head and shoulders chart that projects to 650. 

Conclusion

We are in the midst of a roaring bull market that has been running since mid July.  The leadership is in the NASDAQ 100, so that is where our attention should be.  Look for the NASDAQ 100 to make a new high with a divergence.  A breakout and a failure would be classic.  Nothing about this market has been classic for awhile, so it may be too much to expect, but it bears comment.  Otherwise, look for a break of the trend line.  So far, the market has rallied off of every break, but that can’t continue forever. Complacency is at an all time high – this is the time to be vigilant.  The chart below is my Long Term indicator. As long as the red line is above the yellow line, you stay in the market. As you can see, it has

kept you in the market since the first half of 2003 – it’s a darn good indicator.  Obviously, you would still be in the market.  Note that the price has move into an extended area.  If we are going to ever have a correction again, we should be close to it.  The chart below exhibits the pattern the market has made since the early September low.  I call it “peak, trough, run” for obvious reasons.  If it is going to continue,

we are in the trough phase expecting “run”.  Once again, we are due for a correction – even if it is just a temporary shakeout.  A very temporary move lower could be followed by one more “run” up to test the prior high.  Such a move could set up a divergence and a sell signal so be on the lookout for it.

The above chart is the Advance/Decline line.  It is in new high ground and has broken above its price channel exhibiting the impressive strength that has defined the market.  Note the Dow Jones chart underneath the A/D line.  The three arrows show times that the Dow Jones Industrials have reached their upper channel line.  In the prior two instances, the market has corrected – impressively.  Not surprisingly, they are the two classic tops of the past two years in March of 2005 and May of this year.  The A/D line can set up a divergence or simply turn down.  Unfortunately, a comparison reveals that the A/D turned straight down in March of 2005 and diverged at the more recent top. 

It is important to remember that the market has broken out and that the market has been very strong with confirmation from the Advance/Decline line and darn near everything else. This usually means that the market has higher highs down the road.  In the short term it means that we have reached or are very close to reaching resistance in almost all areas.  The key is in the chart – visually, the market is at a high, not a low.  That, in itself, does not guarantee anything.  What it does do is point out the near term relative positioning of the market.  The market is extended here and the risk level is high for the short term.  The reward/risk ratio is 1:1 at best in the near term.

Happy Halloween!

All the best,

Garrett Jones

garrett111@comcast.net        

NOTE:  THIS E-MAIL REPRESENTS THE VIEWS OF THE AUTHOR AND IS INTENDED FOR EDUCATIONAL PURPOSES ONLY.  THERE IS RISK OF LOSS IN ALL TYPES OF TRADING.  PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

In conclusion, I hate to be a doom and gloomer, but I am a student of history.  And history has a way of repeating itself.  As people who fail to learn the lessons of history are destined to repeat it.  And what is unfolding worldwide is definitely seen in history, over and over again, always with the same results.  It’s not different this time.  It is only unfolding on a bigger scale.  Woe to our children who will have to deal with this mess. And our fellow citizens who do not know about the nature of life, where we must be responsible for ourselves.  Opportunities abound for now, and some will sidestep and profit from the catastrophes unfolding through careful planning and foresight.  I hope you prosper too!!!  I have lots of Tedbits coming your way; the news is unbelievable right now.  If you enjoyed it send it to a friend, subscriptions are free at www.traderview.com .  Thank you for reading Tedbits.

Tedbits is authored by Theodore "Ty" Andros, and is registered with TraderView, a registered CTA (Commodity Trading Advisor) and TraderVest Clearing LLC a GIB (Guaranteed Introducing Broker).  He currently is the principle of TraderView, a managed futures and alternative investment boutique.  Mr. Andros began his commodity career in the early 1980's and became a managed futures specialist beginning in 1985.  Mr. Andros duties include marketing, sales, and portfolio selection and monitoring, customer relations and all aspects required in building a successful managed futures and alternative investment brokerage service.   Mr. Andros attended the University of San Diego, and the University of Miami, majoring in Marketing, Economics and Business Administration.  He began his career as a broker in 1983, and has worked his way to the creation of TraderView of which he is the sole owner.  Mr. Andros is active in Economic analysis and brings this information and analysis to his clients on a regular basis.  Ty prides himself on his personal preparation for the markets as they unfold.  Developing a loyal clientele.

This report may include information obtained from sources believed to be reliable and accurate as of the date of this publication, but no independent verification has been made to ensure its accuracy or completeness.  Opinions expressed are subject to change without notice.  This report is not a request to engage in any transaction involving the purchase or sale of futures contracts or options on futures.  There is a substantial risk of loss associated with trading futures and options on futures.

-- Posted Wednesday, 1 November 2006 | Digg This Article