Dan’s Blog

Cap the Debt!

Dan Calandro - Sunday, September 29, 2013

Yields retreated significantly on the Fed’s recent announcement that it will likely keep its QE program rolling until January 2014 – the same time, coincidentally, when Chairman Ben Bernanke is scheduled to retire. (What a coward. A courageous man would begin untangling the mess he created before he left office. Instead he’ll leave that task to his successor, assumed right now to be Janet Yellen.) 

Stocks held steady on that same news. Below is a picture of the current trend lines.


Bernanke’s most recent validation for continuing QE is because the economy is still weak – unemployment is still way too high, growth is mute, and fiscal viability is getting worse, not better. So it’s time to call all the chatter about the economy getting stronger exactly what it is: a marketing ploy by the Wall Street establishment to lure idle capital off the sidelines from investors who are rightfully skeptical.—And Bernanke is helping them make that case.

As mentioned in Vital Questions, "The net effect of QE to the American market is artificially lower interest rates and theoretically stronger investment banks – not necessarily a stronger dollar or market economy."    

Indeed, QE has made Wall Street banks stronger (How could trillions of free new dollars not do so?)  However, QE has made the Federal Reserve weaker because it is assuming toxic assets from banks in exchange for a portion of the QE money. Transferring bad investments from one bank to another doesn’t create monetary strength. It creates the illusion of strength, as the Federal Reserve cannot be audited. As such, the toxic assets it acquires simply vanish from public view, and as the old saying goes, out of sight is out of mind. But these bad investments still exist. And as long as the Federal Reserve keeps purchasing bad loans and investments made by the Wall Street establishment, Wall Street will keep making them.  

This is misplaced incentive.  

This can be validated by the fact that banks still aren’t lending to American businesses; and the reason they’re not lending is because there’s no money in it – interest rates are too low, and QE is driving them lower. In other words, banks are not applying their new found strength to expand the economic base because they could make more profit by investing that money, which is the reason broader market stock averages like the Dow and S&P 500 are near all-time highs in spite of the very weak underlying economy.    

The definition of insanity is doing the same things over and over again and expecting a different outcome. If trillions of monetary "stimulus" – not to mention trillions more in fiscal spending appropriated by Congress – has been unable to correct economic conditions over the last several years, what makes Bernanke think that extending QE will suddenly do so this time?  

And further, what makes Bernanke think that banks can correct Markets?

It’s time to take stock of government programs that aren’t working and immediately end them. Evidence of failing policies is easy to see. QE for instance, is producing a contrary condition to its stated objective. It is hindering bank lending, not expanding it (because interest rates are too low.)   

The same is true on the fiscal side of governance. Ahead of the implementation of the Affordable Care Act (ACA), company after company continues to move employees off company sponsored plans and into government sponsored exchanges. Last week Walgreens moved 160,000 workers from their company plan; Home Depot shifted 20,000 out of theirs. People are losing healthcare benefits in droves as a result of a healthcare law intended to expand the Consumer base – a contrary condition to its stated objective.

Employees shifted out of company sponsored healthcare programs must now go to government sponsored exchanges that aren’t yet established. Because of this dynamic, it is then possible for people to actually lose healthcare coverage until viable alternatives present themselves. What their costs will be are still complete unknowns, however – and as we know – prices generally spike or collapse in times of Market chaos.  

The ACA is quickly turning into the disaster many didn’t expect to arrive for at least ten or twenty years. Like QE, it must be tapered out of existence and terminated as soon as possible. And time is of the essence!

The major problem with politicians from both Parties is that they’re attempting to correct the fiscal imbalances of government way too slowly. For example, the House of Representatives recently passed a bill to cut $40 billion from the food stamp program over ten years, a mere $4 billion per year. Are they kidding? Last year 48 million Americans received food stamps, a whopping 15% of the population, costing taxpayers $82 billion per year. That’s way too much! – especially when the Bureau of Labor Statistics reports that just 3.6% of the population (11.3 million people) are unemployed.

America is in big trouble unless it acts – and acts fast. 

This makes the debt limit an interesting debate. 

Think of it this way…

The U.S. Treasury, a department directed by the President, is responsible for financing government deficit. Deficit is a condition where government spending is greater than the tax revenues it collects. The U.S. Treasury issues bonds (a.k.a. debt) so that it can spend more than it collects in taxes. The Treasury can only issue debt securities up to the level authorized by Congress.  

Because demand for U.S. Treasury securities has been weak (a condition that drives yields higher) the Federal Reserve has been filling the gap with QE to keep yields low. To put it another way, the Fed prints new money and hands it to the Wall Street establishment, who then purchases U.S. debt with a portion of the newfound QE money. This added demand keeps yields artificially low (that’s why yields spike every time Wall Street thinks QE will end.) I say artificially low because the Federal Reserve must print new money to create demand for U.S. Treasury securities that otherwise doesn’t exist in the marketplace. (Yields rise with excess supply so to entice investors to buy them as opposed to stocks or commodities.) QE offsets that excess supply by printing new money. 

If Congress doesn’t increase the debt limit the Treasury won’t be able to issue additional new debt. This causes a shortened supply of government bonds. The effect of this is easy to see once the basic theory of supply and demand is applied: a decrease in the supply of government bonds along with the added demand from QE will force yields to move higher because demand is increasing when supply is decreasing. This causes the incentive to invest in bonds (yields) to increase. QE, therewith, will produce a contrary condition to its intended objective when supply tightens; it will raise yields.

While tying the debt limit to defunding another unaffordable government program like the ACA may gain some level of popular support, defunding the Wall Street establishment and QE has a much wider base.  Not raising the debt limit will force the central government into a balanced budget (and it’s high time for that), and it will also force the Fed to abandon QE (because yields will be on the rise).

Here’s the fundamental problem with QE: the Federal Reserve is in the business of accommodating the central government, not the American People. And as a result, their policy will always lean in favor of government, not We the People.

The purpose of Congress is to serve the American People. If their policy is to favor Us then Congress will scale-back spending and terminate QE by capping the debt limit. It’s like killing two birds with one stone, and seemingly, the only way a paralyzed and corrupt American government can correct course.

Cap the debt! And say no to increasing the debt limit…

Stay tuned.

Vital Questions

Dan Calandro - Sunday, September 15, 2013

Oh what a difference a week makes. Just one week ago President Obama had virtually no way out of the mess he was about to create in Syria. But then on Monday, Russian leader Vladimir Putin gave him one. Putin is no fool. He knows that many Americans vehemently oppose U.S. military action in Syria, and that Congress and the President were vulnerable to acquiesce. A deal was then orchestrated and brokered by Russia to remove Syria’s chemical weapons peacefully. 

And "the market" breathed a sigh of relief. The Dow Average rose 3% on the seemingly positive news – but stock market strength and gold both lost ground, -2% and -5% respectively. Why?

It is widely expected that the Federal Reserve will announce the commencement of terminating its controversial quantitative easing (QE) program in their next meeting slated for later this month. The Wall Street establishment will hate that news and immediately send stocks lower and yields higher – but that wasn’t on their minds this week. 

Many people still don’t understand the QE dynamic, and as a result, they don’t really grasp the effect of its termination. For instance, some interpret the termination of QE as a strengthening event for the U.S. dollar. They see a decreasing amount of new dollars injected into the system will "strengthen" the dollars already in circulation – and as we know, a strong dollar environment will cause gold to fall. That appears to be the bet gold traders placed this week.  

And it was a sucker bet. Terminating QE does not automatically create a strong dollar environment.

To put it simply, QE is the process of printing new money and handing it to Wall Street investment banks. Investment banks then use half of that money to purchase U.S. Treasury securities (this to create additional and new demand for bonds which helps keeps their yields low), and the other half of the new money is used to sustain Wall Street’s operation by increasing capital reserves and their investments in marketable securities (which helps drive their profits and broader market stock prices higher.) 

The net effect of QE to the American market is artifically lower interest rates and theoretically stronger investment banks – not necessarily a stronger dollar or market economy.  

However, terminating QE can weaken the economy because monetary incentive to keep yields low and stock prices high will end. Higher yields (due to lessening bond demand via QE) will make obtaining loans even harder. This will slow the economy further, and because investment banks will have less free money to profit from, stock prices will have more reason to correct. 

The stock market does not move with unfounded mystery. Indeed, timing the specific day and the certain amount of correction is impossible to predict. Thankfully, those criterions are not required to invest successfully. 

When "the market" trades at irrationally exuberant valuations many unskilled investors feel as if they’re missing something, and feel compelled to buy at the absolute worst times to invest. Buying high and panic selling during dramatic market sell-offs is not cliché, and it’s not the way to make money.  

People always ask me when to buy and how much to buy at any given time. These are personal decisions. We all have different goals, different portfolios, and different risk tolerances and allocations. That’s okay. It’s what makes the world go ‘round. 

Making money through marketable securities is the process of earning a desired return for an appropriate amount of risk. My book provides step-by-step instructions of how to create an investment plan that will achieve your financial objectives. That is to say that a plan, not perfect timing, is required to achieve above average investment performance. 

For example, the chart below shows investment activity since the Dow’s previous all-time high (October 2007) until the present. In that time span the 15-51 strength Indicator produced a 78% gain while the Dow Average advanced just 9%. See below.


Clearly, long-tem investors with above-average portfolios could have profited significantly by investing in what can be considered nothing short of a terrible time to invest; after all, it was the market high just one year before the financial markets collapsed.

However, if alert investors had the patience to wait for correction to occur before investing they would have more than doubled their return. The chart below shows investment activity from the last "market bottom" (February 2009) to now. Please note that February ‘09 was not the 15-51 Indicator’s bottom, as it went lower just as the chart begins.


During this time span the 15-51 Indicator gained 198% compared to the Dow’s 118%. In this case risk was mitigated significantly because the "buy" point occurred at a much lower valuation. The gains incurred during the previous chart came at a much higher price point, at a much riskier time, and produced less reward. 

And who didn’t see the last major correction coming?  

I was writing my book at that time and fully expected another "tech bust" type correction. Worse came for sure (that’s also detailed in the book) but that price correction was fully expected by many independent analysts, including me.

Indeed, money can be made in all types of markets. However, irrational exuberance always sells off. Always - QE or no QE. So why buy into it?

That said – and when deciding how much stocks you should own, buy, or sell – the most vital questions to ask yourself are: How much capital do you want at risk?— How much profit do you want to make?—and, What is your time horizon to make that money?  

Plan your work and work your plan – and let me know if you need help.  

Stay tuned...

See also:

Asset Allocation

ShieldThe road to financial independence.™ 

Syria Could Be It

Dan Calandro - Monday, September 09, 2013

Bond values continue to fall while stocks and gold hold steady amid an awful display of government mismanagement – action in Syria seems likely, the economy continues to limp along, and large government programs continue to produce results contrary to their stated objectives.  

First things first; recall that President Obama was against the Iraq war – even though then leader, Saddam Hussein, gassed the Kurds in the Halabja massacre in the late ‘80’s. While the actual number of Iraqi victims is hard to know, it is widely believed that up to 20,000 people were affected by the chemical attack. The criminal responsible for that Bloody Friday assault, a man nicknamed "Chemical Ali", was at the top of President George W. Bush’s hit list when he went to Congress and the United Nations to request authorization to invade Iraq and remove those weapons of mass destruction. And even though the "world’s red-line" was already in effect, and crossed by Saddam Hussein, Obama stood against Bush’s Iraqi effort.  

The hypocrisy of this administration continues to boggle the mind. 

Russia and China are against involvement in Syria – good for them – but under aggressive French Leadership the European Union advocates a "clear and strong" response. 

Great, instead of being arm-in-arm with a partner known as Great Britain, America will undergo this effort with those famous for waving the white flag. Just great.

In the fighting thus far, more than 100,000 people have lost their lives in the Syrian civil war, which began almost three years ago. They say that 1,500 people were gassed with chemical weapons – this time. Remember, the same kinds of weapons were used in Syria one time prior, about eighteen months ago. 

Right now there are two main groups fighting in Syria. The Iranian terror network Hezbollah, a Shi’a group, is backing the Assad regime. The Al-Qaeda terror network, a Sunni group, is supporting the opposition. 

In other words, two enemies of the free world are fighting each other in Syria and President Obama wants to jump into the middle of them. Who does he expect to help —his enemy, or his enemy?  

Indeed, many non-terror related Syrians are caught in the middle of this brutal and barbaric war – but it is their middle. Not ours. To get involved is a huge mistake.

And don’t you find it hypocritical with all the war talk on the president’s part that he continues to advance more gun control efforts in America? (see: Obama Administration Rolls Out New Gun-Control Efforts, Wall Street Journal on-line, 8/29/2013.) He is an international war-monger, and a domestic pacifist. 

More and more he is getting harder to believe.

IBM recently announced that is was moving 110,000 retirees off its company sponsored health plan to defray rising costs. With the passage of the Affordable Care Act (ACA), President Obama promised that prices would fall and people could keep their current insurance plans if they wanted to. Do you think all 110,000 of these people wanted out of their insurance plan?

Costs continue to rise dramatically and lots of people are losing their healthcare plans because of the new healthcare law. More and more the ACA is proving to be nothing more than a fast-track to a single payer government system.  Of course, that’s not what was advertised – though it was fully expected (see: Supreme Letdown).

These kinds of failures in leadership and policy, along with multi-trillion dollar deficits that have added nothing to the economic base (unemployment is still 7.3%), are reasons why Americans are losing faith in their government, and why the world is losing respect for American governance. 

That is also the reason that bond values continue to fall (indicated by rising yields) and stocks and gold are flattening (see below.)  Stocks are looking for an impetus to go lower; and gold is looking for the same stimulus to go higher. 

Syria could be it.  


Stay tuned…

ShieldThe road to financial independence.™

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