Dan’s Blog

Who's Yellen Now?

Dan Calandro - Sunday, March 23, 2014
Blogging regularly is an interesting chore. Sometimes the most important topic to talk about is obvious, and other times it’s hard to find. Sometimes the title is self-evident, and other times it doesn’t present itself until long after the fifth draft. It’s an odd process to the say the least.

This week’s title came to me like an epiphany as I watched Janet Yellen take questions from reporters for her first time since taking the top job at the Federal Reserve. Yellen’s message was mostly the same as Ben Bernanke’s, no doubt, but her presentation was undeniably different. And it has me interested. 

Many people with concrete values and perspectives have assumed high political office only to change their believe structure soon after appointment, and in dramatic fashion. Small government advocate Thomas Jefferson and his authoritarian approach to the Louisiana Purchase is a case in point. Today’s question is simple: Will Janet Yellen be as "accommodative" to the Obama agenda as Ben Bernanke was, or will she force the hands of fiscal governors by taking a new strong dollar position? 

"The market" seemed to be confused about her message last Wednesday, as stocks sold off while she took questions from the press. But why? Yellen continued former Fed chairman Bernanke’s QE tapering plan by decreasing the amount of new money by $10 billion per month. Banks will now get $55 billion of fresh new cash every month – an amount that will provide the U.S. Treasury plenty of wiggle room to fund government debt and deficit for the current fiscal year. 

Without congressional action, the Fed is best positioned to reel-in runaway spending programs advocated by President Obama. All by herself, Yellen can make it harder for Congress to authorize irresponsible spending without impunity. Higher interest rates will do that.  

Interest rates have no choice but to rise without QE support. This is a simple matter of supply and demand. At current levels QE satisfies 100% of annual government deficits (estimated this year to be approximately $600 billion, or $50 billion per month.) When the Federal Reserve stops printing money to buy new debt the free-market will have to fill that gap; and sooner or later lenders will demand higher rates of interest to do it. That force, the pricing power of the free-market system, will prove the Reverse Repo an inept tool for keeping rates low. 

Yellen is smart enough to know this. And so is the Wall Street establishment.  

That’s why the stock market gets so antsy around every Fed meeting. Out of one side of their mouth the Fed continues the QE taper (an essential tightening of money) and out of the other side promises to remain "accommodative" (i.o.w. to maintain cheap and easy money policy) into the foreseeable future. The two positions are contradictory, and as such, institutional investors don’t know what to think – hence Wall Street’s itchy trigger finger.  

While a main objective of QE was to keep yields low, another major goal was to strengthen large U.S. banks. The Fed reported this week that 29 of the 30 largest U.S. banks passed their most recent stress tests, a measuring stick implemented in the wake of the ’08 crash. This provides the Fed further support to continue tapering QE. And like Bernanke, Yellen put forth the conventional caveat to QE tapering and future interest rate hikes – they’re both conditional based on economic performance. This seemed to add more uncertainty to the trading public.  

Some institutional investors took her comments as an indication that the Fed would raise interest rates sooner and more aggressively than Bernanke had suggested just a few months ago. It was this interpretation that sent stocks initially lower. 

But stocks regained their upside footing by week’s end under the prevailing thought that Yellen’s remarks were most likely a "rookie gaffe." I’m not so sure about that. Yellen has been around the Fed game for a very long time. Calling her wet behind the ears is a bit too trite for me to swallow.  

This is an election year that should feature a clash between fiscal prudence and unlimited government spending. By setting a tighter monetary stage after the election takes place and a new Congress is installed, Yellen is sending a very important message to the boys and girls in Washington DC: take fiscal matters more seriously because deficit financing will not always be as easy as it has been.  

While it is hard to know how Janet Yellen will govern monetary policy over the long term, one thing is for sure: she didn’t sound like the dove everybody had anticipated. It was quite evident in this first press conference that she knows how difficult it’s going to be to gracefully unwind the excess liquidity QE has produced – and that she’ll need higher interest rates to do it.  

That’s why bond traders are so skittish. They’re looking to protect their flank by making portfolio adjustments the second interest rates pivot to the upside. They were expecting Yellen to favor easier money (lower yields) for a longer duration than Bernanke did. But that didn’t come across this week – and it left traders wondering, Who is Yellen now?

The answer to that question will evolve over time – and it will be interesting to watch.  

Stay tuned…

ShieldThe road to financial independence.™

Why Stocks are Over-Valued

Dan Calandro - Sunday, March 16, 2014
Gold continued to move higher last week as stocks made a U-turn to the downside. The Dow Average is down 3% so far this year, and 15-51 strength has peeled off 2% from its prior year-end. But gold is the story; up 15% year-to-date. 

The chart below spans a very short time period (just the 11 weeks so far this year) but I think it helps make a clear point about the current market dynamic.  


In times of low inflation and solid economic growth, stocks and yields should move together higher, while gold goes lower. That’s opposite the movements shown above. And the reason for that is quite simple: the economy isn’t producing solid, stable growth despite historically low interest rates and inflation.

That’s what makes the stock market so over-valued at these levels. It’s being valued as if the economy is steady and growth is solid – which it’s not. Growth is weak and uneven at best, and the global economy is fragile. QE, not economic performance, is artificially driving stock market gains and yields lower.
Let’s widen the viewpoint for further discussion. Below is market activity for the most recent twelve months. 


Stock movements during this time look relatively mute, but that’s an illusion. The Dow Average added 10.5% and 15-51 Strength gained 19% – two solid twelve-month performances. Gold’s movement appears fairly moderate as well, but it’s down double-digits (14%) even with its recent 15% upward tick. 

Those moves are downplayed in the chart because of the dramatic move in yields during the year, which caused the chart’s scale to widen. The 10-year yield went from 1.85% to 2.64% in this time – a 42% move to the upside, and four times the rate of growth for the stock market average. While the move in yields is large, interest rates are still historically low at 264 basis points for the 10-year Note; so the move in yields must be taken for what it’s worth – inconsequential in the grand scheme of things.  

Nevertheless, the current market trend held true: stocks and yields in one direction (up) and gold in the other (down). This pattern can be mistaken to signal a strong economy. 

Below is the same chart but without yields shown. 


People thinking that movements in the stock market and gold are reflective of a strong economy are drinking from the wrong teacup. If a real and legitimate boom was going on the Dow Jones Industrial Average would have no problem trading above 19,000 – three thousand points above its current valuation (16,066); QE would have been long gone, and yields would be much higher than they are today. In addition, the action zone high point as depicted in the chart would also be higher than its current level (15,652), as economic output factors greatly into its calculation. But that’s not the case. No economic boom exists. 

The point is: Markets, and their according dynamics, change fluidly.  

For instance, stocks and yields haven’t always moved together, just as gold wasn’t always on the opposite side of their coin. A widening view of the time period illustrates this clearly. See below.


For a time in 2011, stocks and gold moved higher and it was yields that took a different downward path. That dynamic started to change in the fourth quarter of 2012; at which time gold began to correct in earnest, and yields joined stocks and moved higher. 

Case in point: When the condition of the Market changes so will "the market" dynamic.  

For example, should the ugly face of inflation present itself both gold and yields would begin moving together to the upside, while stocks would head lower. The reasoning is logical. Inflation is the cost of money, and when that increases so does the cost of debt (which is simply borrowed money.) Inflation steals value from paper money and makes precious metals worth more; and because of this, lenders demand higher rates of interest to cover the declining dollar.  

The declining dollar affects both businesses and consumers alike; each loses purchasing power, incurs higher operating and interest costs, which in turn produces lower spending, savings, profit and investment. This ultimately causes stock prices to fall.  

I guess what I’m trying to say is that the market is in constant motion, with constant change. As Market conditions change so do market dynamics. 

Below is an even longer-term view. 


Yields went nowhere but down during the time period shown above but aren’t included in the chart. Showing a yield trend would widen the chart’s scale so far that it would flatten the Dow's trend-line so dramatically that it would render the chart useless. Without that distraction the chart makes the long term trend easy to see: Gold and stock market Strength have long been running the same upward path. The Dow is up, but meagerly – just like the economy. 

Unlike gold, stocks have yet to correct since ’08 crash. They are extremely inflated, which is highlighted quite clearly with the performance of the 15-51 strength indicator, which gained an amazing 116% during the time shown above. The Dow Average added just 13% since hitting its previous all-time high in October 2007, which is a tad bit shy of the pace set by Nominal GDP. It’s a pathetic Dow performance if you really think about it, but it's over-valued nevertheless. It’s just harder to see.

The over-valued condition of stocks can be tied directly to QE.

QE is a tool the Federal Reserve uses to service the debt obligations created by American central government. The Fed keeps yields low by printing new money to purchase the excess supply of U.S. Treasury securities left on the market. This easy money transfer gives government more room to incur greater annual deficits (as interest rates are low and the Fed is the largest buyer of U.S. debt.)
Remember, only half of the QE money goes to the purchase of the U.S. Treasury securities. The rest remains in the coffers of large Wall Street banks. And what do you think they do with it? They invest it – ergo, stock market inflation.  

And by purchasing U.S. Treasury debt in such dramatic fashion, the Federal Reserve facilitates greater fiscal deficits created by the boys and girls in Washington DC. This action temporarily inflates GDP like a balloon.

Think about it. President Obama’s most recent budget calls for $4 trillion of spending, an amount approximate to the size of the entire Chinese economy. These high spending levels have contributed to GDP growth, no doubt, but any positive impact is meager, uneven, and fragile. This is due to the poor economic performance produced with the money central government borrowed. 

That’s why government spending isn’t worth the investment. Washington DC is made-up of mostly snot-nosed spoiled brats with law degrees who think they know more about capital investment than does free market enterprise. That’s a costly misnomer, as proven by their pathetic long-term track record.

Barack Obama has borrowed $6.5 trillion during his presidency (and has spent $15 trillion in total thus far), and the Federal Reserve has injected another $4 trillion of new money – an unprecedented amount of monetary and fiscal stimulus.  And what has that $20 trillion produced? A fragile and jobless recovery burdened by massive national debt and a stock market bubble with no economic base to support it.

Consider the consequence of this to our greatest generation. U.S. government bonds have long been the preferred vehicle used by senior citizens to fund their retirements. That is an impossible avenue to take with persistently low interest rates. So instead senior citizens and fixed income people get forced to chase profit in the volatile and corrupt world of the stock market. That’s blasphemy. Senior citizens should be incentivized to retire safety in U.S. Treasury securities, at an interest rate all Americans can be proud of.

The bottom line is this: the U.S. government is paying 2.5% on a ten year loan that is producing little to no economic benefit or return on investment. That’s embarrassing. Our money shouldn’t be that cheap. It should be worth more – much more.  

The problem is that higher yields in America would cause global interest rates to move significantly higher – and that would throw a wrench into the world order. Higher interest rates would act as a pariah to weak socialist countries like Greece, Italy, Portugal, and a host of others. They’d buckle under the pressure, and some would fail. 

That’s the major problem with current Fed policy: it’s easier on the world and worse for America.  

If anything has been proven by QE it is that the mere injection of money doesn’t automatically produce monetary circulation and economic growth; and that with it congressional debt limits get suspended without impunity. 

This continues to be a smoke and mirrors rally, inflated by irresponsible government spending and facilitated by cheap and easy money policy.

The Dow is over-valued because it and GDP are artificially inflated. 

And both are due to correct.

Stay tuned…

ShieldThe road to financial independence.™

Big Hat No Cattle

Dan Calandro - Tuesday, March 04, 2014

Stocks regained some upward momentum last week as stock market strength gained 2.5% and the average added 1.4%. Gold has quietly risen 10% from its 52 week low set just a couple of months ago. And while the recent ten-point pop might not take all the sting away from the gold correction, it did serve as a wake-up call to many investors, short-sellers, and media pundits. 

Even though gold has consistently gone down in the last few years nothing has changed with its market condition. Long term investors with a perceptive understanding about the condition of money and debt could just as easily purchase gold now as when it hit its all-time high in August 2011, when the price reached $1,814 an ounce and the GLD was at $182 per share. In fact, the basis to purchase gold now or at its high is the same exact reasoning for not buying bonds during the same time. See below.


Conditions that are bad for money are also bad for debt because debt is only borrowed money. Those same conditions happen to be good for gold. Yet bond values and gold have traveled a strangely similar trend-line in the last two years. That’s because of QE, which has been forcing yields down and stock and bond values up. The decline in gold is a byproduct of that dynamic.   

Most don’t people don’t remember or appreciate that the housing-boom was a Clinton initiative. Affordable home ownership was part of his political platform when he ran for president. Then Federal Reserve chairman Alan Greenspan implemented a cheap and easy money policy to aid President Clinton in achieving that objective.  

The problem was that Greenspan waited too long to tighten money, and then when he finally did it was perhaps the worst time to do so. He totally mismanaged the money supply during this time, and it sill confounds me how he escaped public ridicule in the wake of the ’08 crash. And yes, I understand the logic to his policy stance back then. 

The economy was growing briskly, the tech-boom was in heat, and Clinton won another term. In time Clinton made good on some campaign promises and raised taxes (a tightening of free-market money supply so that monetary policy could remain loose) and greatly expanded the CRA and resources to Fannie Mae and Freddie Mac to facilitate the underwriting of subprime mortgages to lower income people. 

Fannie and Freddie then used their newly granted capabilities to pass high risk debt to Wall Street banks, who then cut them up and bundled them into some kind of marketable security that nobody quite understood – but everybody had to have. They were bundles of synthetic securities, backed by American land and a federal guarantee against default, which were commonly referred to as "asset-backed securities."

At the time asset-backed securities gained steam the investment markets were going crazy; everything went up, all the time. The tech-boom was creating all sorts of new wealth that made taking greater risks easier to do. This high action, even to a watchful eye, acted as a smoke-screen to the major threats brewing in the financial industry. And even though Greenspan was the one toiling the potion, he totally miscalculated the boiling point. 

The Federal Reserve monitors and regulates all banking activity in the U.S., including Fannie Mae and Freddie Mac. He should have made synthetic land-backed securities illegal, and if it was outside of the Fed’s authority, Greenspan should have alerted the public and pressed Congress to do it. These fake securities were the poison that Wall Street OD’d on and ultimately crashed the financial markets in ’08; and sadly, are still legal to exist today – no thanks to Dodd-Frank. 

While it was prudent for investors to enter the gold market early in the late 1990’s, building a gold allocation became much easier to do in November 2004, when gold was securitized and traded like a stock under the GLD symbol. This enhanced access helped fuel the 21st century gold rush, which took off in earnest in 2006, when the housing-boom and cheap and easy money were in full gear. See below.


It has been previously demonstrated here how gold has been a leading stock market indicator since sloppy monetary policy became standard operating procedure in the U.S. Gold has routinely peaked and corrected several months in advance of stocks (see noted dates above.) 

Gold hit its all-time high in September 2011 when news of another monetary crisis dominated the news, this one coming from overseas (Italy, Greece, Spain, Portugal, etc.) And when all that went away*, gold corrected to the downside and stocks went on a boom-like run. (*PS: I’m just being facetious here. The overseas financial crisis really didn’t go away. It was just postponed – and then removed from the news cycle.) 

The reasons for having a gold allocation haven’t changed since the late 1990’s. The value of the dollar has been slipping ever since, and so gold remains perfectly positioned to capitalize on the bursting of the QE-bubble. Such an event will greatly diminish the value of money and debt and cripple global enterprise; a bad condition for stocks and bonds, but ripe for gold.  

These are not the times to take more risk than you can comfortably afford. Cash is still king – especially when considering recent developments… 

Fourth quarter 2013 GDP was revised sharply lower to 2.4% from 3.2%, and those fractions add up to big bucks when relating to a $17 trillion economy. The original estimate seemed high at the time because it wasn’t consistent with the soft holiday message retailers were reporting. The revised estimate still feels high to me. 

In other news President Obama recently released a $3.9 trillion budget that adds about $600 billion to the national deficit. In the same memo, Obama said deficits will return to pre-crisis levels by 2018 – two years after he leaves office. That’s way too late! National debt will climb to over $20 trillion by that time. It’s totally irresponsible, and quite piggish. Spend, spend, spend, and then leave the tab for someone else to deal with.

In my neck of the woods that's called a fink.  

Perhaps that’s why Russian president Vladimir Putin has absolutely no respect for him. Obama can’t face the tough issues, and is getting totally outplayed at the game of life in the real world, where the big boys play. Obama is a spendthrift that is otherwise all talk and no action, or as an old southern epitaph would describe: a man with a Big hat and no cattle

And the world knows it.  

Take the situation in the Ukraine as an example. The European Union was aggressively negotiating with the Ukraine to join the EU. As we know the EU is dominated by Germany, the economic powerhouse and financier of the region. In other words, Germany spreads her wealth to attract new members to the territorial union it controls. And just as a deal to acquire Ukrainian membership was about to come to fruition, Ukrainian president Viktor Yanukovych took the deal to Russia – who then beat the EU’s offer, which was then accepted by Yanukovych. 

But Cold War sentiment still runs deep. 

The Ukrainian people overwhelmingly wanted to join the EU and thereby push themselves further away from Russian dominance. Mass protests took to the capital streets of Kiev and ultimately resulted in the ousting of President Viktor Yanukovych, a Russian sympathizer. 

Once the capital was seized a well-organized opposition turned their sights to the critical port region of Ukraine called, Crimea – where the Russian Navy maintains a base and fleet. Crimea has a significant Russian population. 

About ten seconds after President Obama warned Russian leader Vladimir Putin not to get involved in Crimea, Putin pushed his parliament to approve military action there. Russia took control of the Crimean region in short order and without a single shot being fired, where a standoff between the two militaries is ongoing.  

When will Russia stop its advance?—and what kind of duress will it take?

An impotent Obama looks confused, unprepared, and weak.

This is not good for America and free-markets. 

And you know things are that bad when a virtual (a.k.a. fake) currency like Bitcoins can attract enough money to screw the world out of a half-billion dollars overnight. Virtual currencies like Bitcoins are meant to be a Shangri-La of money markets, where free people determine fair value through free internet trade or exchange. But here is where they fail: they are run by two-bit conmen looking to scam people who are desperate to sidestep currency manipulation by central governments. 

No reason to be lost in this horizon. There is no substantial base-value supporting virtual currencies. They’re a ponzi scheme. And the only people who should be buying into the Bitcoin craze are fools comfortable, willing, and able to put their entire home’s value on the color green at a Vegas roulette table. It’s a long-shot gamble, plain and simple.

So stay away from all virtual currencies like Bitcoins. The global market isn’t ready for them, and England’s intention to tax them is completely misplaced. Applying a tax to Bitcoins implies that they are a legitimate, credible good or payment tender. And they’re not. 

Buying gold today at $1,800 an ounce (a $500 premium above its current price) is a much better move. It’s safer, has more intrinsic value, and has a brighter future.  

In short, stocks remain "high," gold is "fair," America is weak, and the world is a mess.


Protect your flank.

And stay tuned…

ShieldThe road to financial independence.™

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