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Gruber Acknowledges Supreme Letdown
Nov 17, 2014

Those who haven’t yet appreciated the recently released statements by Jonathon Gruber should know that the chief architect of the Affordable Care Act (a.k.a. ObamaCare, or the ACA) testified that that law could only be passed by means of fraud, deception, and "the stupidity of the American voter."


How Gruber’s provocative admission isn’t plastered all over every media outlet is not only a travesty to We the People, but also negligent, corrupt, and criminal. His short form statement can be found here; and a long form statement can be found here


Indeed Gruber is partially right. Some Americans are, in fact, stupid; these are people capable enough to be well read and independently minded but instead choose to be led by media propaganda and political pressure. Then there are those who are illiterate; these are people without the ability to read and understand the most basic dynamics of the market economy.  And sadly, yes, people from those two groups can cast a ballot and vote.


But not all American voters fit into these two boxes.


It should not be forgotten that more than 60% of Americans polled at the time of ACA passage were against the law, and outraged by the shenanigans Congress pulled to force that law through the system. Remember, Scott Brown promised not to deliver the 60th vote Democrats needed to pass the law if he won Ted Kennedy’s Senate seat, which he did. That was when Senate Majority Leader Harry Reid changed longstanding protocol and forced the bill through a process called reconciliation, which requires only 51 senatorial votes. Up until the passage of the ACA reconciliation had been reserved only for budgetary items. That makes ACA passage through reconciliation a clear breach in standard operating procedures for the U.S. Senate.  


This is not to mention the breakneck speed in which the bill was forced through congressional chambers, leaving little to no time for members to actually read the bill that was put to vote. That was when Speaker of the House Nancy Pelosi attempted to calm the controversy by notoriously stating, "we have to pass the bill so that you can find out what is in it."


I’m not so sure that’s what the Founders had in mind when they established congressional protocols. 


So there was a lot of outrage and dissent for ObamaCare, then and now, by a majority of voting Americans. And while there might be some truth behind Jonathon Gruber’s statements – heck, some people are still stupid enough to think the ACA is actually good law, good protocol, and good for the market – the fraud he reveals in the law’s passage is most stunning.  


In a presentation given at the Annual Health Economics Conference in 2013, Gruber and his cohorts actually poke fun at Chief Justice John Roberts for transforming ObamaCare’s penalties into taxes. The law, he said, was written in a "tortured" way to fleece the Congressional Budget Office and sway the Supreme Court, which it did. And just to make that point clear, Gruber’s elitist position places Justice John Roberts in, and at the top of, the "stupid American voter" group. 


Gruber has picked a major fight.


The way I see it: Gruber’s statements, the most recent election results – and the Supreme Court’s recent decision to review another major threat to the ACA’s constitutionality – completely reopens the national debate on ObamaCare. 


In a blog posted just a few days after the Supreme Court held that the individual mandate was constitutional, my blog Supreme Letdown highlighted the main reasons why the High Court’s decision was flawed (that entire blog follows this one).


In short, the Supreme Court held that the individual mandate was constitutional because it considered the law’s stated penalties as taxes – a clear constitutional power authorized to Congress – and because of precedent. After all, Americans are already mandated to purchase a national retirement program (Social Security) and senior citizen health insurance (Medicare).


And while Supreme Letdown provides a salient argument on the tax issue, it didn’t vividly address the obvious problem with the mandate issue. Never before in American history has Congress mandated American citizens to purchase a product or service from a private organization. Social Security is purchased from the U.S. central government. Ditto for Medicare. Their according taxes are collected by the IRS with specific tax rates on specific activity (wages). 


ObamaCare mandates people to purchase services from private healthcare insurers – not yet a government entity – and according taxes are collected by insurance companies. The tax rates are unknown to consumers and are dictated each year when policies renew. In other words, the healthcare tax rate is a moving target and can change without voter repercussion – and it has nothing to do with the level of activity. For instance, taxes paid by workers into Social Security and Medicare increase as their wages increase. Not so with health insurance taxes, which can rise or fall without any change in consumer activity. Instead, and without little doubt, the healthcare tax will be driven by central government deficit and the ruling Party’s political agenda.


Doesn’t that make you feel warm and fuzzy – especially when considering all the persistent incompetence displayed in Washington DC?


The fact of the matter is this: if ObamaCare could pass with only 51 Senate votes it can be repealed with the same number. Republicans have that number. But they will need 66 Senators to overturn Obama’s veto. The only chance they have in getting those votes is to pass a replacement that will efficiently and effectively achieve the objective – to lower healthcare costs and increase individual enrollments.


Here are some rallying points to compromise:

1.      Cut Corporate Tax Rates – if insurance companies pay less federal taxes they will pass less of those taxes onto consumers, which will lower healthcare prices. Or if that can’t pass then how about making the amount a company pays for healthcare insurance premiums double or triple tax-free (this to encourage enrollment). 

2.     Cut Personal Tax Rates – many doctors make a lot of money; their profession costs a lot of time and money, and the cost of malpractice insurance is outrageously high. They deserve a robust return on investment. If doctors pay less personal taxes they will pass less onto their customers – and consumers will have more money to pay for services.  Or if that can’t pass then provide a tax credit to those enrolled in an insurance program (again, to encourage enrollment.)

3.     Allow Health Insurance companies to Compete Across State Lines – prices fall when competition increases. The federal government must breakdown State boundaries to make it easier for healthcare businesses to compete nationally.

4.     Mandate all Insurances companies offer Healthcare Insurance – prices fall when competition increases. By offering multiple lines of coverage insurance companies will be better able to diversify risk across business units (i.e. health care, property & casualty, life, etc. etc.)

5.     Make Pre-Existing Exclusions Illegal – common sense, prices fall when more consumers (a.k.a. demand) contribute to overall expense. Besides, a free market is an open market.

6.     Increase Grants for Nurses and Doctors – prices fall when Supply (a.k.a. healthcare professionals) increases. We need more doctors and nurses; investing in them is a worthwhile government investment.

7.     Increase Grants for Immediate HealthCare Clinics again, we need more Supply to help prices fall – especially where dense populations exist. This will help inner cities and the poor, a worthwhile government investment. 

8.     Mandate that Immediate HealthCare Clinics Stay Open until 10PM – All too often a sickness happens after office hours of doctors expire – when people return home from work. Emergency rooms are the most expensive providers of healthcare services. They should be reserved for emergencies and unfortunate circumstances in odd hours.

9.     Impose a Healthcare Penalty on any employed person over 26 years of age and Not Enrolled in a major medial insurance program.

10. Limit the Amount of Malpractice claims to $10 million – Indeed, there is no way to appropriately value human life. My life is priceless to me, so any amount would be too low. But we need to address this out of control cost element; limiting damages will help do that. (Mandating malpractice insurers to also cover major medial insurance will also help.)

11.   Maintain that Medical Decisions are made Strictly between Doctor and Patient – whether it’s the government or a panel of doctors paid by some insurance company – no one knows better about appropriate care than doctors and their patients. Government and insurance company bureaucracies need to stay out of the decision making process; they can’t be trusted with our well-being. 

12.  Expand Medicaid until Supply catches up with Demand and reasonable prices exist in the marketplace.


Such a bill can be written is just a few pages, some 2,475 pages less than the ACA; and it will be much more effective in achieving the stated objectives. Yeah, it’ll take some time.  But it’d be worth it. 


I have one more quick point to make before leaving you with Supreme Letdown; at the end of that blog I say, "The "healthcare boom" begins today – and that includes price inflation…"


For those who believe the stock market is a leading indicator of the economy, consider that since Supreme Letdown was written the Dow Jones Industrial Average (a.k.a. "the market") is up 36% and United Healthcare is up almost double that, 68%. 


As a side note, my group insurance policy is up 27% in the same time. 


So contrary to the pompous ass that Jonathon Gruber is, some of us American voters had ObamaCare figured out from the very beginning.  


And I do hope, truly, that Chief Justice John Roberts has the last laugh. 


Until next time…


Stay tuned.



# # #


Supreme LetDown

Jul 07, 2012


Let me begin by saying that I’m not a lawyer and I have a plaque on my desk to prove it. But I can read, and have an independent mind. My goal in this blog area, as always, is to provide you – the independent investor – with all the tools and analysis required to invest successfully on your own. That is part of my chapter 8 guarantee.    


For those of you who do not yet know, LOSE YOUR BROKER NOT YOUR MONEY won the 2012 International Book Awards for Investing. It did so for a reason. In the book I demonstrate how to identify changes in Market condition long before stock markets react to them. This allows you to stay way ahead of the trading curve. (It makes making money so much easier.)


As we know, governments control Markets. The American system of government has three branches: Executive, Legislative, and Judiciary – governors, regulators, and judges. Policy and legislative changes from any branch of government are major Market indications. Supreme Court decisions, while not permanent, are very close to it. 


Red alert!


Recent Supreme Court decisions are poised to dramatically affect the American Market and stock market valuations going forward. Independent investors must take note: These rulings signify major changes in Market condition and direction.   


In two incredibly important issues facing the U.S. economy (immigration and healthcare), the Supreme Court dealt the American cause a severe blow in two specific cases: 

         Arizona v. the United States (a.k.a. ARIZONA), and 

         National Federation of Independent Business v. Sebelius, Secretary of Health and Human Services (re: Affordable Care Act, ACA). 


After reading the Opinions in their entirety, I am left with two profound questions:


1.         At what point in American history did individual States cede their right to protect and defend their citizens as defined by federal statute – should the Federal Government choose not to enforce their own laws?  


2.         Exactly what clause in the U.S. Constitution gives the Supreme Court the power and authority to impose a tax on the American People against the clear intent of Congress and popular sentiment?  


In a nutshell, States and People lost big-time with these two Supreme Court miscues.  And that’s not good for Markets, People, and Stocks. Here’s how I see it.  


# # #


What happened in ARIZONA?

Arizona citizens, under a duly authorized elected government, enacted three laws that identically mimic Federal Statutes. They did so to enforce laws that the Federal government was not was enforcing in the same manner as in neighboring states, California, New Mexico, and Texas. Arizona claims that such a policy makes their state a "gateway" for illegal immigration – a real problem in the State, as the data proves.  


The Fed cited "limited resources" for not enforcing border controls in Arizona but asserted that the Arizona laws were unconstitutional because border issues were restricted for Federal enforcement only. States had to stand down regardless of federal policy. 


And the Court agreed.   


# End of Summary #


ARIZONA highlights the burden of failed immigration policy. Crime is up, jailhouses are full, and Arizona’s education and healthcare systems are greatly strained. The Arizona government contends that the fiscal cost of an open border is vastly greater than responsible border enforcement. The data overwhelming corroborates their position. Illegal entrants have imposed a severe cost to their State and they wanted to employ their resources to stop the incursion.   


But the Court ruled against them, and as such, provided all future presidents with the ability to use immigration policy – and border security – to sway elections and coerce States into following their national and political agendas. 


How could any right-minded American believe that the Colonies gave sole control over their security to one man named, President? Something seems truly un-American about this type of individual federal power.


All fifty states lost in ARIZONA. Today all States are less free, less stable, less profitable, and more vulnerable. And since States are just Markets, it’s safe to say that all Markets also lost with this decision. Remember, dollars spent on the costs associated to illegal immigration come at the expense of free market activity, and are thus bad for investments, markets, and taxpayers (a.k.a. Consumers.)  


Not good.  


# # #


What is the issue with the AFFORDABLE CARE ACT (ACA)?

Two central themes of the Act were contested: the Individual Mandate and the Expansion of the Medicaid program. In the ACA, all able persons are required to purchase "minimum essential" healthcare insurance.  It’s commonly known as the Individual Mandate. It assesses penalties to certain people for non-compliance of the Mandate.  


The ACA also requires all States to participate in the program. Congress achieves this by stripping a State from all of its Medicaid funding should it not participate in the ACA. 


In a nutshell, Congress makes it quite clear that the only way the ACA program could work was if all the People in all the States participated.  


The questions before the Court are simply these: 

1.         Can Congress compel people to purchase a product against their free-will?

2.         Can Government force all States to comply with the ACA by withholding all Medicaid funding – Or is this extortion? 


In the end, the Court found the Individual Mandate constitutional under Congress’s taxing authority and struck down the Congressional effort to withhold all Medicaid funding for non-participating States. The Court held that States foregoing ACA participation can only lose new Medicaid funding under the expansion plan.  


# End of Summary #


Somewhere along the line the Supreme Court lost its way – they, too, serve the cause to support liberty and protect the rights of the American People (a.k.a. Consumers) under our founding principles. The Affordable Care Act (ACA) was rammed through Congress against popular demand, with many polls showing more than 60% of Americans against the bill at the time of passage – a sentiment that still rings true today.    


Most of the Justices forgot that the Individual Mandate was sold to the American public specifically as a "penalty" and definitely "not a tax." While admittedly, the ACA is laden with taxes and duties, the Individual Mandate was specifically labeled a penalty numerous times in the areas defining it. The Supreme Court, against the Chief Justice’s pledge in his confirmation hearings, legislated from the bench, re-wrote the law and made liars out of Congress – and by so doing, levied a huge tax on the American People.  


That’s not the way our system was intended to work.  

And because the intent of the law was changed from a penalty to a tax, the Court in effect changed the character of the government’s role in the healthcare market from penalizer to insurer.—And that’s where the big problem is. 


In the ACA, government looked to penalize certain groups of people, i.e. those who do not buy medial insurance. Ok, fair enough. The only way Congress could "finance" the ACA was if every able person purchased health insurance. It’s a Mandate, punishable by a monetary penalty for non-compliance. 


To be clear: a penalty is a punishment for breaking a rule. A tax, on the other hand, is something entirely different. A tax is a required contribution to the government levied on income, profit, or certain goods and services.  In other words, all active People pay taxes; while only Violators pay penalties.  


By transforming the penalty into a tax, the Supreme Court’s decision creates more confusion – What will this new tax be called, and how will Congress impose it? 


While these are legal barriers that a sly Legislature will surely overcome, I can see an easy Congressional remedy on the immediate horizon: They will raise the Medicare tax to pay for the Medicaid Expansion under the ACA, because under its definition, all Violators already pay taxes. This incubates a single payer system. 


And just like with Medicare the government will end up calling all the healthcare shots – who gets what care, when, what it will cost the patient, and what the provider will get paid for it. After all, they will be the single largest payer of it all. This makes government the primary insurer and ultimate price fixer in national healthcare – a power born by Congress’s taxing authority, so this High Court says.


Unlike the Court, elected officials are driven by political motivations and spend money for reasons other than return on investment. It’s strictly political. That’s why they waste so much money – and why the American system was founded on three separate and equal branches of government. Our Framers knew all too well the natural tendency of government to expand power in order to gain domineering control. The Supreme Court, by design, is supposed to be liberty’s last defense against overzealous Executives and Legislatures. On that front, We the People have lost big with these two Court opinions.  


And that’s not good for consumers.


When governments become too intrusive in markets corruption is not far behind and calamity is right around the corner. Recall the subprime mortgage debacle as explained in my book. What started in the 1990’s fell into ruin in the fall of 2008.  It was too easy – and money was too cheap for far too long.  

Sound familiar?  


The Affordable Care Act (ACA) is positioned to do the same thing to the healthcare market that the Community Reinvestment Act (CRA) did to the financial markets – it caused calamity. Not overnight, for sure. But in due course.


And for those of you who think this Supreme Court ruling is a great sign to a great new American Way – think again.  Medicare is government run healthcare – and it’s broke. Medicaid – a State and Federal joint program – is collectively broke. Social Security, a nationalized retirement program, is bankrupt by any reasonable account – regardless of the amount of taxes levied over its many decades of existence. 


Do you see a pattern here?—If not, look to Greece and Spain for the end game (who, by the way, are drastically cutting education and healthcare programs at the present time.)


If you are middle-aged and are investing for retirement you must put your portfolio into high gear! Expect the cost of living to rise dramatically. No longer can you afford the establishment’s offerings (mutual funds and Social Security) to finance for your retirement well being. They will fall way short.


The "healthcare boom" begins today – and that includes price inflation – and will continue until another major fiscal crisis erupts. Sorry to say.  


Prepare your portfolio now.  


And let me if you need help.  


ShieldThe road to financial independence.™

Down, Up, and Around the World
Oct 27, 2014

Volatility has once again found the stock market – and again, contradictory new reports are at the core.


On Wednesday, October 22, 2014, the Wall Street Journal online posted an article entitled, Clouds Darken for America’s Blue-Chip Stocks, citing weak results for traditional powerhouse stocks like AT&T, Coca-Cola, IBM, Wal-Mart, and General Electric. The article went on to note that a collective one-third (or 66%) of the entire Dow Jones Industrial Average "posted shrinking or flat revenue over the past 12 months."


Stocks fell 1% on that day. 


But just one day later, on October 23, a contradictory article appeared in the same publication entitled, U.S. Stocks Rally on Strong Earnings. This article reported strong earnings performances by two key Dow components: Caterpillar and 3M. Those two stocks, just 7% of the Dow, lifted "the market" by more than 1% on Thursday; and then added another point on Friday, October 24.  


Around the world poor economics continued to pour in – starting right here in America. On Thursday the U.S. Department of Labor reported worse than expected new jobless claims (283,000), and U.S. manufacturing fell short of expectations. 


In China, the world’s second largest economy, growth was projected to "slow sharply during the coming decade," while its "productivity [takes a] nose dive." China’s new government continues to struggle making economic reforms and is currently facing a "deepening housing slump" and serious environmental and budgetary concerns.


A lackluster China hurts global output. 


In the troubled Euro-Zone the first wave of earnings reports showed significant weakness – a grim outlook for their economy – especially now that the European Central Bank announced 25 of the Euro’s banks recently failed stress tests. 


Not good.


With all the war and strife in the Middle East it’s easy to forget about their economies. Managing director of the International Monetary Fund, Christine Lagarde, hasn’t. She recently urged Persian Gulf countries to balance their budgets amid falling oil prices. Those countries, like Saudi Arabia, have been on a spending spree building critical infrastructure elements like roads, bridges, and hospitals to fend off radical sentiment and unrest stewing from the Arab Spring. A significant drop in oil prices will cause unsustainable deficits that will threaten their spending efforts.


And then who knows what will happen there. 


Russia is in somewhat the same predicament. Already hampered by western government sanctions imposed for its actions in the Ukraine, a drop in oil prices greatly affects central government planning in that communist regime. For instance, Russia’s budget is predicated on an oil price of $100 per barrel. Oil is currently trading at $81/barrell. This kind of strain causes the specter of war to increase, as wartime conditions in oil rich nations threaten supply and raises prices – to thus increase revenues to oil dependent nations. 


The world is on a collision course with calamity. 


Yet the stock market appears not to see it. And while volatility has re-entered the equation, stocks and gold have produced little blood so far this year. See below. 


Both stocks and gold have moved a lot so far but have really gone nowhere: the Dow Average is up just 1.4%, 15-51 strength has gained only 1.7%; and gold - down 11% from its year-to-date high - is higher by just 1.9% in the ten months. 


Stocks and gold seem to be basing at these levels. 


Perhaps that is more easily seen through a longer view. The chart below spans more than three years and begins when stocks essentially reached "fair value." During this time 15-51 strength gained 70%, the Dow Average added 44% and gold lost 8%. See below.


During the period shown above the economy grew at just 7% in Real terms – just a few measly points per year. That puts the growth multiple for the 15-51 strength indicator at 10 times economic output, and the Dow Average’s at 6 times, or 600% of economic output. 


That’s an unsustainable level of stock price inflation – which is the reason for increased market volatility - around the world.


Stay tuned…


ShieldThe road to financial independence.™

The Same Different Things
Oct 05, 2014

Reoccurring themes in the markets continued to play out again this week: the unemployment rate dropped to 5.9% – and labor participation didn’t change a bit; it’s still at 40 year lows. The International Monetary Fund (IMF) predicted lower global output warning "high debt, high unemployment…and mounting risks in the financial sector could spell years of weak growth" – yet European bonds went negative, a condition where lenders pay borrowers to borrow. Negative yields are a bad sign; they indicate an ass-backwards market – yet the stock market remains near all-time highs. 

Let me try to make sense of things…

As mentioned in Danger Will Robinson, the European Central Bank (ECB) is enacting a charge to deposits held by large European banks. This move is intended to encourage lending by charging an expense to idle bank capital. In other words, put idle capital to work or pay a tax.  

But the European economy stinks, as noted above by IMF managing director Christine Lagarde. Her comments substantiate the reason the ECB announced their plan to initiate a quantitative easing (QE) several weeks ago. QE is a move intended to strengthen banks. 

So let me ask this: If European banks are weak (hence the need for them to be strengthened via QE) then why is the ECB forcing them to lower their capital reserves by charging them an expense on those same reserves?

When asked why Europe would adopt QE, Andrew Roberts, co-head of European economics at RBS, said "Italy is the reason…[their] economic weakness is deepening." Yet Italy’s bond yields have dropped a stunning 63% since the last time they were bailed-out (2012), and they currently pay fractions less than the U.S.

How Italian bonds can be yielding 2.4% while the U.S. is paying essentially the same rate (2.45%) is nothing short of market dysfunction – a dysfunction that can only occur with over-reaching government intrusion.

Here’s how it happens…

Europe is in a no growth position and is again teetering on recession; job growth is dismal and free market activity is in such steady decline that deflation is a legitimate concern. For these reasons companies do not want to borrow - prospects are too bleak. And individuals aren't borrowing as well - either they don’t’ want to borrow or cannot afford to do it.


Europe is in economic gridlock and money isn’t moving. That’s why the ECB is acting. 

Unfortunately their actions will only make matters worse. Consider this…

Banks, now forced to put excess capital to work or face a charge, and with only limited free market options available, look to profit and cover their costs (the charge from the ECB) by lending it to sovereign States, like Italy. Italy’s current yield (2.4%) easily covers the charge imposed by the ECB (estimated to be a small fraction less than .25%.)


That's what markets do; they inherently search to maximize profits. Profit, of course, is their goal and purpose. Besides, States like Italy are more likely to get bailed-out when the next mess hits the fan – especially with a QE program already in tact. In other words, sovereign debt produces more return with less risk.


Sound familiar?- Wait, there's more... 

The increased demand for sovereign State bonds forced by ECB policy is the driving force behind falling yields in the Euro Zone. Put another way, poor monetary policy is facilitating higher debt levels to entities that can’t rightfully honor their obligations – like Argentina, Portugal, and Italy, to name a few.

Ironic, isn't it?- This is the same exact dynamic that occurred during the "subprime mortgage crisis" that produced the 2008 market crash. The only difference this time is that the lending isn’t happening to individuals unable to repay but Countries!

That’s a much bigger problem. 

So many things point to history repeating itself. For instance, during the last debt-boom the yield curve was often inverted, where consumers realized a monetary benefit from taking more debt (even though they couldn’t pay it back) because interest rates were less than inflation. The same is true now in Germany, where yields have recently gone negative.


With demand being so great for international sovereign debt, Italy, like so many subprime mortgagers did during the housing-boom, has no problem taking on more debt than it could reasonably afford - at rock bottom interest rates.

So please tell me: Why should we believe that this monetary ponzi scheme won’t end with a worse kind of disaster as the last one? - especially knowing that the same exact things are being done now as then, albeit in a slightly different manner.

The next crash is going to be an ugly one because not just banks but countries will be failing. Central bankers will be unable to print the massive amounts of new currency required to avert disaster without wreaking inflationary havoc on the economy. That’s why gold remains a huge buy here – and I don’t care one bit it has taken it on the chin lately. That’s a total misnomer (see: Programmed Trading for more info.) 

There’s an old saying, trade on speculation and invest on facts. The first is a short term perspective and the latter is a long term strategy. 

Think long term, strategically, and…  

Stay tuned…



The road to financial independence.™

Danger Will Robinson
Sep 28, 2014

It’s so easy to beat a dead horse. I mean, we can rehash the turmoil in the Middle East and President Obama’s foreign policy failures; we can beat the drum about lackluster global demand and zero growth economies, or we emphasize that point by highlighting the fact that China’s production posted the weakest quarter since the doldrums of the "financial crisis;" or we can lament about the paralyzed status of the U.S. government, the monetary ponzi scheme it has concocted, or its irresponsible fiscal dynamic. Indeed, we can talk about all of that, again, in the same way. 


Or we can approach the market condition from a different angle.  I was drawn to a recent Wall Street Journal headline, Fed to Hit Biggest U.S. Banks with Tougher Capital Surcharge. Isn’t this ironic, I thought, especially when considering that U.S. banks have been flooded with trillions of dollars of new capital since 2008 and have yet to do with the money what it was intended to do – to be lent to small and midsized U.S. companies to get the economy going. Because of this inaction, one would logically expect banks to have plenty of capital reserves lying around. But apparently that’s not the case, for if they did the Fed wouldn’t have to enact a "charge" on them to encourage larger capital reserves (less lending).


That is to say that Dodd-Frank has done nothing to correct bank practices that led companies "too big to fail" to fail. That is also to say that large U.S. banks continue to do the things that led to the last major financial meltdown.


To combat this poor state of regulatory policy, the Federal Reserve will enact the reserve charge to force U.S. banks to keep more capital on hand (and thus to lend less) to cover future and inevitable losses. The hope here is to avoid blatant taxpayer funded bailouts – because as we know, QE is a discreet way of doing just that – bailing-out banks.


Consider this…


It is common knowledge that the Federal Reserve is currently weighing its options and alternatives to exit QE, a long overdue event. To do so the Fed will have to tighten money and raise interest rates. Economic data, produced by the government mind you, is showing signs of "strength" – unemployment is "down"; economic growth, though weak and uneven, is "stable"; world governance is strained but not yet "failing"; and the U.S. dollar appears to be "strengthening." And though the Federal Reserve has pointed to an interest rate raise hike in 2015, the aforementioned data points are forcing a debate within the Fed to move sooner. 


Rates usually rise in advance of a rate hike, but bond yields are low and falling. The 10 year yield is just 2.5%. Below is a year-to-date picture of investment activity. Stocks are up 2% and yields are down 17%; gold, after being as high as +14%, is now up just 1% for the year. Chart below.



Yields are down because institutional investors are scared. The economy is weak and the stock market remains over-heated and near all-time highs. And so grows a sentiment that U.S. bonds, and to be fair German bonds, are "safer than gold." In other words, investors would rather invest in government debt than commodities at the present time. This temporary dynamic will only last as long as inflation is low and governments remain stable and solvent.


In a nutshell, a flight to "safety" is causing bond yields to fall and a false sense of strength in the currency market is causing gold to move lower. Both are market anomalies. Currency isn’t strong and bonds are loaded with valuation risk, as yields can only move higher from here (a condition that causes bond values to fall).


Owning gold may not look like a "smart" move right now because so many extreme anomalies exist in the markets today. But that’s not why investors own gold. Investors own gold now because they accurately see what’s going on in the markets today, and because they want a hedge to the stock market when it takes a nosedive.


Again, hedging is about having an allocation in an asset class that normally runs in a contrary direction as the portfolio’s core holding. In other words, the hedging asset must increase when the other falls, and vice versa. The hedge now, against stocks and bonds, is gold because gold should fall when stocks are up, and vice versa. That is the current market dynamic. 


The easiest way to tolerate a falling gold position is to appreciate that it should be falling because the stock trend is rising. This can be seen much clearer in a longer view of the markets. In the last two-plus years the Dow Average is up 14%, 15-51 strength is up 21%, and gold is down 8%. See below.



Again, when stocks go up gold should go down, and vice versa.


Now, I totally understand that it’s easy for new investors to think that there will never be another severe correction, another great opportunity to buy low – and that gold is a dead asset. But if another significant correction doesn’t happen sometime in the near future it will be the first time in history it hasn’t happened. Markets go up and down all the time; and more times than not they trade well above or below "fair value." Corrections are part of the game. It’s the nature of the beast.


QE has tightly tied the performance of gold to the stock market because the rise in stocks has been driven by the new money it has infused into "the market" – it’s a QE boom. So when stock values fall due to a tightening of money, gold will rise because tighter money does not automatically produce stronger money – because the underlying economy is weak.


Higher interest rates do not produce strong economies or currencies. That’s a false conclusion being made in the markets today. Instead, strong economies produce strong currencies and higher interest rates are a byproduct of that dynamic. Not the other way around.


Independent investors must guard against getting caught up in the dogma that this is a new "paradigm" where major market corrections aren’t possible, that gold has little value and profit potential, and that rapidly rising stock market values which in no way correlate to economic activity are totally legitimate. That’s a costly misnomer.


Based on current Market conditions and a rational market the Dow should be trading around 13,000 and gold should be about $2,000 an ounce. But logic is nonexistent in today’s investment markets.  


In today’s market a few things are clear: the upward movements in the stock market have slowed down significantly, the trading range is tighter, and new highs are obtained more tepidly. That’s because traders know how toppy this market is. And that’s why they’re scared and moving to Treasuries.


Gold is currently $1,200 an ounce, but if markets and currencies were as strong as some are programmed to suggest, it would be trading much lower than that, perhaps half the going rate; and yields would be much higher, perhaps twice their current level. 


Asset allocation is always key; patience is a virtue, and discipline is the bridge between goals and accomplishment - (Jim Rohn).


You should know that this is a dysfunctional market driven by easy money, irresponsible government spending and corrupt management; not economic wherewithal.  


And believing otherwise is where the danger is, Will Robinson. 

Stay tuned…


Shield The road to financial independence.™

Programmed Trading
Sep 07, 2014

Gold lost more than a point last week when news broke the U.S. dollar had hit fresh new highs against the Euro and Japanese Yen. That was on the first trading session of the week, a day when gold lost 1.8%. Remember, the U.S. is the world’s reserve currency, and when currency is strong gold is weak.


Adding to the false impression of a strong currency market was the "raft of improving U.S. economic data" many media outlets were reporting. They cited improving consumer confidence and a bettering condition for labor and employment. Again, this news broke on the first day back from the Labor Day holiday, Tuesday, September 2, 2014.


Institutional investors that are programmed to trade on the newest news place trades according to logarithmic formulae. When the value of the Yen and Euro fall against the dollar the trade goes in: buy the dollar and sell gold; sell bonds and buy stocks, because a stronger currency indicates economic strength and increasing profit for enterprise. That’s why yields reversed course and rose 5.2% last week. See below. 



Logarithmic trades are performed by machines without hearts, eyes or ears. Everything is a number, and every situation can be defined in a series of 0’s and 1’s. But the language of computers, binary code, is not intuitive. It must be fed information by people, and that’s where the corruption begins. 


Information inserted to trading platforms is an instruction to act. But if the data never gets there – say, if it isn’t entered into a system to be considered – trading goes on as if the condition doesn’t exist. The computer, without a free and intuitive mind of its own, simply doesn’t know a new fundamental has been made available, and so it conducts no trade to compensate for the new condition. 


At eight-thirty in the morning on Friday, September 5, 2014, just three days after news broke about the "strengthening" U.S. dollar, the Bureau of Labor Statistics released is most recent jobs report - and it was awful. Employers added just 142,000 jobs in August, and numbers for July were revised down by 28,000 jobs. Through July employers had averaged just 226,000 jobs per month, a pathetic amount by any account, and well below what is required to truly correct the course of economic output. One would think this negative employment fundamental, a reoccurring theme in this "recovery", would have been considered during trading hours on Friday, September 5.—But no, stocks ended higher on the day. 


Perhaps the Wall Street establishment cut the Friday workday to instead head to the Hamptons for a little more R&R; maybe they spent the day at the golf club; or maybe they arrived to work late only to skip out early to a liquid lunch that consumed the rest of their day – whatever the case, the newest employment data was never automatically fed into their trading system for the shortened week of September 5.


That’s hard to fathom, isn’t it? – especially when considering that Wall Street brokers are always the first to preach that a team of dedicated people monitoring every piece of information every second of the day is required to invest successfully.


They clearly don’t practice what they preach. Look at my shocked face. 


More sadly, however, is that the Wall Street establishment is just as robotic as their programmed trading logarithms; and like computers, they too don’t have a heart, clear eyes or keen ears.


Wall Street players select and direct what information is considered for daily trading, and when. Their motives are geared to fortify their agendas - not the true market narrative, or what's in the best interests of their clients. But there’s no reason to be confused or misled.


Employment gains during economic booms normally average 500,000 per month. America hasn’t come close to that during the whole "recovery" – even though the stock market is indicating a boom greater than that of the internet driven tech-boom. While 226,000 job additions per month is bad enough, a 35% drop from that in August should have certainly caused the stock market to reverse the course of "stronger dollar" gains reaped earlier in the week. It should have been automatic, or should I say, programmed to be automatic.  


Point number one: stock market trading is choreographed by Wall Street players and manipulated through large institutional investors; always has been, always will be.


Point number two: just because markets move on news doesn’t make the news, or the move, valid. Consider this…


The Euro Zone has been a chaotic mess that has been well chronicled in these blogs. Adding to its sordid history, European Central Bank chief, Mario Draghi, recently launched a QE effort and surprised the region by cutting lending rates again (to .05%) and placed a charge (.20%) on deposits. That is to say lenders won’t receive interest income as usual on deposits they hold; instead they will be charged interest expense for the cash they keep on hand. This is a move to encourage banks to lend, and to penalize them if they don’t.


The EU needs banks to start lending so enterprise can grow and expand. But lower interest rates won’t do this, nor will a charge on deposits. No one wants to borrow money over there because enterprise doesn’t see a worthwhile return on investment. Monetary policy can’t fix that.


Levels of investment and lending are at all-time lows in Europe because the EU’s economy is dying a slow death due to massive government regulations, poor fiscal policy and incompetent management, and extraordinarily high taxes. As a result, their currency should be falling against the U.S. dollar.


Japanese Prime Minister Abe followed the U.S. lead and adopted easy money policies to make their currency more competitive in a devaluing world. The Yen was too strong, and their goods were too expensive in overseas markets like the U.S., the Euro Zone, and China. This, of course, was Abe’s intention when his government employed easy money policies. So it should be no surprise that the Yen is falling as compared to the U.S. dollar. That’s what Japan was trying to do. 


But this dynamic does not make for a strong currency market, or a strong U.S. dollar. Monetary strength cannot be derived from currency devaluation. Instead, monetary strength is derived from vibrant economies. And unfortunately there aren’t many of those in today’s world market.


News of a strengthening U.S. dollar is misplaced. Ditto to last weeks moves in gold and yields.


In fact, the only way investors can mistake a monetary race to the bottom as strength is to be blindly programmed like the binary code of an unseeing, unhearing, heartless machine.


Conditions remain ripe for gold and a significant correction in stocks.


Stay tuned…


 ShieldThe road to financial independence.™



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