The Economy Guy

Stocks moved sideways along with the Euro, oil/gasoline.
Bonds moved up quite a bit today, as interest rates for the 10 Year Treasury Bond fell 0.1%
Gold had a technical rebound from recent lows.

In the news today…..

Real Estate Tax in Healthcare Bill – yes, there is a new real estate tax in the new Obamacare law.  It is a 3.8% Medicare payment for the sale of real estate of your home or investment property.  But, don’t worry, it’s only for RICH people.  It is a very complex calculation, but basically it says if you make over $250,000 (married, joint return) and sell your home you still get your $500,000 exclusion, but any profit over that has this tax, but could be reduced based on your actual earned income.  Ugh.  Naturally, it was important to pass the bill so we knew what was in the bill!!!!!!!!

SEC not transparent – which is part of the Financial Reform Bill.  Inside this bill, it states that the SEC will NOT respond to any Freedom of Information Act request.  In other words, everything that the SEC does from this day forward is “secret.”  Only the President and Congress will know.  I guess we had to pass this bill in order to know what was in the bill!!!!!!!!!!!

2nd Q GDP – is 2.4%.  So what, you say?  Well, the revised (downward) 1st Q was 3.7%.  So, what’s the trend?  DOWN, of course.  This does not say much for all the rhetoric from DC and Wall St about how well the economy is actually ”growing.”  The conclusions I draw is that the economy is worse than our “best of the best” economists think, and we are headed to that dreaded double dip recession; and that means the FED will be buying US Treasuries to bolster the market.  I also conclude that you can’t believe anything coming out of Washington regarding the economy as they couldn’t walk and chew gum at the same time – let alone understand the US economy.

Tonight’s Dinner Conversation……

Manufacturing – where is it going in the US?  While manufacturing is only a small part of the GDP calculation (as we have shipped lots of manufacturing jobs overseas), it does have a dramatic affect on the unemployment rate.

So, what’s happening in the US today with regards to manufacturing?  Take a look at the Richmond FED’s report on manufacturing:

The trend is dramatic and traumatic and at the same time.

This follows this week’s horrendous fall in the Texas business activity index from the Dallas FED, which fell from -4 in June to -21 in July. “Thirty-one percent of firms reported a worsening of activity, up from 22 percent in June,” said the FED.

And…

This follows the fall in the Economic Cycle Research Institute (ECRI) leading indicator for last week to -10.5, a level that has ALWAYS been followed by recession in the post-war era. The ECRI is careful not to jump the gun, waiting for further confirming data before issuing a formal recession call that would hurt its credibility if proved wrong by events.

So, these numbers should give you impression that the future is NOT BRIGHT.  These are what the FED looks at, and they are drawing the same conclusions as all the discussion about future “quantitative easing” says.

And, here is a neat graph from the Wall St. Journal comparing what’s going on in our stock market today as compared to 1938 when the government’s actions drove our country deeper into the GREAT DEPRESSION:

The primary theme of the WSJ article is that the stimulus may have averted a depression, but that “toxic, anti-business rhetoric and policy errors like the Dodd-Frank bill are hurting the still-fragile recovery.”

The policy errors the WSJ refers to include raising taxes and tightening by the Fed – which is exactly what happened in the depths of the depression, triggering the second long leg down shown in the chart above.

This is just food for thought, as 1938 is different from today (because our year starts with 20..)  Otherwise, there are a lot of similarities.  Don’t panic, just think about what happens if this WSJ prediction is correct…….

Here are the last numbers for today:
Dow Jones 30 Industrial – 10,466 (down 1)
10 Year Treasury Bond – 2.19% (down 0.10%)
Euro – $1.3038
Gold – $1181 (up $13)
Oil – $78.87 (up $0.51)
Gasoline – $2.11  (up $0.01)

 Stocks, the Euro, oil/gasoline all moved sideways today.

Bonds fell with an increase in interest rates.

Gold fell and hit $1180 for the third time in the last two weeks, and is now a cautious buy for those of you who are thinking of buying some more gold.

In the news today……

Consumer Sentiment – fell to one of its lowest levels in a long time.  This is just bad news for the economy in general.  Take this indicator with some scepticism, as it is fickle, and can change radically month to month.

High End Housing – is being foreclosed on by banks, just like lower priced homes are being foreclosed on.  The difference is that banks are not putting the expensive houses back on the market.  The definition of “expensive” is above $300,000.  Take a look at the following table of homes that are being held by banks in various cities, and you will draw this DRAMATIC conclusion.

Why are banks holding back on selling their “expensive” homes?  Well, first of all, there are many, many more cheap homes being foreclosed on.  And, second, what would happen to the housing market if these expensive homes were dumped on the market?

Simple answer.  The price of expensive homes would be depressed (even more than they are today), and they would put a downward pressure on cheaper, lesser quality homes.  In other words, banks would lose money by selling their expensive homes today.

The only question I must ask is WHEN will the FDIC or FED require the banks to sell these non-performing loans?  

The conclusion that you can reach from this interesting story is that there will be a day of reckoning when housing prices will be going down further, and now you have one additional reason why they will be going DOWN.

Here are the last numbers for today:
Dow Jones 30 Industrial – 10,538 (up 12)
10 Year Treasury Bond – 3.05% (up 0.05%)
Euro – $1.2997
Gold – $1183 (down $12)
Oil – $77.50 (down $1.48)
Gasoline – $2.06  (down $0.06)

Stocks blasted forward by 2% on optimism in the stock market.  The Euro, gold, and bonds went sideways.

Oil and gasoline jumped up as traders decided that oil was just too cheap.

In the news today……

Mortgage Rates HIT RECORD LOW – according to Freddie.  A 30 year mortgage is now 4.56%, the lowest since 1971.  A 15 year mortgage is 4.01%.  These are average interest rates (some higher, and some lower.)

GM to buy AmeriaCredit – for $3.5B.  Why?  In order to make more risky auto loans and expand its sales?  Risky loans were one of the evils that got GM into trouble in the first place.  As YOU own GM (the US taxpayer is a 61% shareholder), were you asked if this was okay?  Are you “represented” in Congress in this action?  I doubt it.  Oh, by the way, where does this $3.5B come from?  More to follow…..

Unemployment Claims – jumped to 467,000.  This is a “seasonally adjusted” number – so it isn’t real, but it does give one important message.  Getting is job is VERY HARD, and people’s demoralization over employment opportunities is realistic.

Existing Home Sales – FELL 5.1% on a seasonally adjusted annual basis – some fairly meaningless words to obviscate the truth.  The truth is that home sales are falling, and will continue to fall.   The “inventory” (that’s a word for the number of homes on the market for sale) rose 2.5% last month to 2 million homes – and this is a 9 month supply of homes if they sell at the current rate – but, the rate is falling, so it will just take longer to work off this inventory.  The median price of homes sold was $183,700, up 1% from last year – this is the only bright spark on the picture, but don’t hold your breath.

Congressional Confidence – hit an all time low of 11% today.  Rather than just crow about how much everyone hates Congress, I would like to take this opportunity to talk about what this means.  First of all, it means that we don’t like what Congress is doing “to us.”  We have a representative democracy, called a Republic, and the folks we vote into office to represent us better do it, or we will vote them out the next opportunity.  At least that’s the theory.  But, there is something fundamentally wrong with Congress today and yesterday too.  You might ask what Congress has to do with the US economy; but I think the majority of you know the answer to that question as I continually point out their insane, dumb and stupid economic decisions.  But, more importantly, I want to talk about the fact that we have been trusting Congress less and less over the years as seen in the following Gallup Poll graph.

It doesn’t matter what power is controlling Congress.  Americans are disliking their Congress more and more.  There is something “fishy” in America, and it is time we cleaned house once and for all.  My continuing opine to “Throw the Scumbags Out” is not the ramblings of an insane loner living in a cave.  It would fundamentally change this graph, and if we didn’t like the results of our elected representatives, we would throw them out all over again.  Think about this seriously.

Economyguy ALERT

If you are holding municipal bonds in your portfolio, it is important that you read this alert.  The medium term risk for municipal bonds is increasing as states, cities, etc are moving toward default.  While the FED will probably come to the aid of the municipal market to prevent a meltdown, it probably won’t come to the aid of any given city or state, and certainly wouldn’t hold up bond prices to protect investors.  The FED will let your muni bond portfolio devalue.  Most municipal bonds are not insured – so don’t count on that.

There are Credit Default Swap insurance available for municipal bonds.  Illinois and California bonds must pay over 350 basis points, as compared to Spain where it is about 280 basis points.  In other words, the markets are saying that a California or Illinois default is more likely than a Spanish default.

Compre the return on the  muni bond to US Treasuries, and you will probably find the amount of added interest is not great.  It certainly isn’t worth the increased risk of a falling bond market.  Consider eliminating muni bonds from your portfolio and replacing them with equivalent US Treasuries.  Consult your financial advisor and get a second opinion.  The purpose of this alert is to get you to start thinking for yourself.

Tonight’s Dinner Conversation…..

The new Financial Regulatory Law, and what it means to you….  Well, as you know, I am against this new law.  There is probably a good provision or two hidden among the massive legislation, but it will be hard to find as you must pay more, and more, and more, and more…. to get the services you already use.  For example, the “unfair or deceptive” practices identified by the FED prior to the law’s enactment have disappeared.

Here are my main objections:

1. The bill doesn’t address the root causes of the financial meltdown.  The root causes were low FED rates and Fannie/Freddie/FHA.  Here are some details:
   
   1. Without the FED low interest rates (to solve the stock market bubble) there could not have been the “teaser mortgage rates” that enticed people to take out impossible mortgages.
   2. Fannie/Freddie/FHA gave loan guarantees to banks making the loans in the first place – so there wasn’t any risk for the banks making the loans.
   3. So, today Fannie and Freddie continue to make those guarantees, and almost all mortgages today go to Fannie and Freddie.  The one big difference today from before = YOU ARE THEIR OWNER, and of course, you pay all the bills when they come due, and they’re coming……
   4. FHA continues to guarantee loans too, but one big difference.  FHA also is taking SUBPRIME mortgages today, and YOU OWN IT TOO.
   5. Congress put political pressure on Fannie/Freddie to take bad loans (think of Barney Frank), and nothing has changed with Congress.  Even the same people are there to harass Fannie/Freddie, and as the US owns them, they have more “say” on the way Fannie/Freddie operates.
      
2. “Too Big To Fail” is now a law.
   
   1. Do you remember as ALL politicians said that this new law would eliminate TOO BIG TO FAIL?  Well, they lied.  Now, the government MUST take over these banks if they are going bankrupt.  And guess who pays the bill AGAIN?  
   2. It also allows the government to take over any company that “in the mind of the government” could endanger the US economy.  That particular power is rather sweeping, qne therefore, dangerous.
      
3. It costs you more money.
   
   1. The new regulations touch every financial transaction you can think of, and many you can’t think of.
   2. Organizations must have “compliance officers” as employees of their organization to insure that they follow the new law.
   3. All this costs money.
   4. YOU WILL PAY – one way or another – either higher costs or lower services.
      

Are you happy yet?  Did you think it would be any different?  Remember who voted for it?  Who stood up against it?  I say (again), throw all the scumbags out at the next election.  They continue to do damage to YOUR pocketbook.  It’s more polite to say they are damaging the economy (fewer jobs, higher costs, bigger government) but in reality IT HITS YOUR WALLET/PURSE!!!!!!!!!!!!!!

And, as one small way of showing the results of this new law, the 3 rating agencies (S&P, Moody’s, Fitch) have STOPPED giving out their ratings as of yesterday so they can take legal advice on the new law.  You see, the new law makes their liable for their ratings, and they would have been sued out of existence when the economy blew up if this law had been around.  (Remember that they were putting AAA ratings on real JUNK, and were a big part of the problem.)  

The result of their actions are:

1. The bond market is frozen this morning.
2. No new bonds can be issued without a rating.
3. Maybe this is the beginning of a major revamp of the ratings system – top to bottom.
   

Here are the last numbers for today:
Dow Jones 30 Industrial – 10,322 (up 202)
10 Year Treasury Bond – 2.93% (up 0.04%)
Euro – $1.2889
Gold – $1195 (up $4)
Oil – $79.08 (up $2.52)
Gasoline – $2.15  (up $0.08)

Stocks fell today on Ben Bernanke’s testimony to Congress – he wasn’t optimistic at all.  Interest rates fell in sympathy.  All other markets went sideways except the Euro which fell today.

In the news today…..

Taxpayers sink another $700B – of aid into financial system. Taxpayer support for the financial system increased by $700B over the past year, bringing the total to around $3.7TRILLION, said TARP inspector general Neil Barofsky in a quarterly report to Congress. Most of the increase was due to government pledges to supply capital to Fannie Mae and Freddie Mac and to guarantee more mortgages to support the housing market.

Barofsky also criticized the Treasury’s housing relief efforts, pointing to “anemic” participation numbers that have failed to “put an appreciable dent in foreclosure filings.”

Separately, the Treasury said it plans to end a long-delayed and never-used $30B TARP program designed to boost small-business lending.

What does all this mean???  It means that the governments own people are saying that we are spending too much.  It also means that Obama is spending more on TARP-like projects than TARP ever spent – and is doing it without the involvement of Congress.  Who is in charge?  Obama, of course.  Congress is irrelevent right now when it comes to spending.  Also, note that Barofsky had the audacity to criticize the efforts that Treasury was making to help homeowners.  He went on to say that because Treasury never set any targets, it was impossible to say whether or not the program was working.  As you can see, Treasury doesn’t have anyone inside it with an iota of real world experience, or common sense.

Remember to vote soon, and vote often.

FED Chairman Bernanke – in Congressional testimony today said that the future was “murky.” And, this did not do good things for the market – as markets like certainty, and not uncertainty.  He said that government spending would be less than before as would inventory replenishment.  He also said that consumer and business spending would offset those  losses, so growth would continue.  I am not sure what he smoked just before that statement.

Tonight’s Dinner Conversation……

Quantitative Easing – that is a great topic.  Why talk about it?  Well, the FED said that they think there is a 50/50 chance that the economy will falter (deflation), rather than rise.  So, how does the FED fight deflation?

1. Reduce interest rates – but they are zero now, so they can’t do any more.
2. Buy US Debt – that’s another name for Quantitative Easing.
   

The last quantitative easing took place in late 2008, and amounted to $2 TRILLION of money being created and given to our BIG banks to save them from going bust (Too Big To Fail).    But, I want you to better understand the insanity of quantitative easing.  I will do that with an analogy.

Let’s assume you run a small company, and you’re worried that the customers just aren’t buying enough, and your income doesn’t meet your outgoings (hope this sounds like the Federal Government.)  You have a lot of loans from the banks, and the interest is hurting – but you just want to ignore that side of the equation.  So, you decide that the best way to go forward is to “buy your own debt.”

You go to another bank, and convince them that you have some great investment to make (buying your own debt), and they loan you a bit bundle of money. The bank agrees (reluctantly) and makes a small condition that you put up 100% of the money you want to borrow. You go to the first banks, and buy back your debt (pay off your loan) using the new bank’s loan money.

Now where do you stand?

1. You have removed your old debt.
2. You have added a new equal debt.  We won’t get into the argument about a change in the interest rate.
3. You have put up (printed) an equal amount of money to the new debt, as the new bank is holding this money as “security” on the new loan.
   

As a small business owner, are you better off, or worse off?  This is not a trick question.  You are worse off, of course.  You no longer have the flexibility of using your own cash.  I hope you get the “insanity” of anyone doing this type of transaction.  The FED doesn’t get it, but they are just trying to survive – after all.

Here are the last numbers for today:
Dow Jones 30 Industrial – 10,121 (down 109)
10 Year Treasury Bond – 2.898% (down 0.04%)
Euro – $1.2769
Gold – $1192 (no change)
Oil – $77.44 (no change)
Gasoline – $2.07  (down $0.01)

Stocks rose today on Apple’s earnings report.  All other markets were sideways.

Gold bounced off its support level, and rose $10 today.

In the news today…..

Underwater?? – that’s the amount of a home’s mortgage minus its value.  Lots of homes are underwater, and lots of homes aren’t.  Ever wonder what all US homes look like when aggregated?  Well, the FED did us the service of calculating this.  It took the total of all mortgages, and it subtracted the value of all homes (whether they are underwater or not).  The difference?  $4 TRILLION.  Yes, that is a whopping number, and it gives you the meaning of depression for homeowners.  This naturally leads us to how we get out of this massive hole.  Well, it’s simple.  We wait for home prices to go up.   Gotcha.  How do home prices go up?  Well, they can do it the hard way – by having more buyers than sellers.  Or, it can be done the easy way – by having inflation – and I’m betting on this method.

Goldman Sachs – is being ignored by European nations which need big bank help in selling their bonds.  As Goldman Sachs played funny games (to feather their own nest) in Italy and Greece, other nations are now shunning Goldman.  (The Worm Turns.)  Also, in another story, Goldman is going to pay out 45% of its revenue in 2010 to its employees.  That seems rather a lot – doesn’t it?  Where is the Pay Czar when you need him?  Is he getting part of the payout too?

Bank of Canada – raised their key interest rate for the second time another 0.25% to 0.75%.  Watch your neighbors if you want to know what’s going to be coming to this country.

China consumes more energy – than the USA, and is now the number one consumer of energy.  I hope those bleeding hearts tell the Chinese to reduce their carbon footprint before that foot wears a boot, and stomps on his head.

Tonight’s Dinner Conversation…..

Has TARP (or any other government program) really helped?  I say no.  I say it just postponed the inevitable.  Another way of saying this is “Would you rather die of a swift blow, or by a thousand cuts?”  The government just cuts us 1000 times – hope you are enjoying it.

We are facing a cliff in the economy – employment, consumer sentiment, housing sales – all are awful.  The future only looks glum.  The news will be talking more about a “double dip recession” soon.

Take new home sales.  They are currently 300,000 homes sold versus 1,800,000 homes during the height of sales.  I call that a “cliff.”  As I have written before, this is actually good news, as new homes just add to the number of homes in the US, and we need to get rid of the housing overhang before housing prices can turn around.  Housing is fundamental to the US economy in direct and very indirect ways.

Would there be any employment bump up if we didn’t have a census?  I doubt it.  The government continues to create strategies that cost jobs – NOT create jobs.

So, what’s going to happen to the stock market?  It depends on what the government does.  If it decides to have a QE2 (Quantitative Easing version 2) or has another Stimulus, then the stock market will try to use that new money to drive stocks up.  BUT, the bond market probably won’t accept this NEW money this time around.  It was fooled last time (2008 financial crisis when $2 TRILLION was created by the FED), but it won’t be fooled this time around.  Your job is to watch and listen to what’s actually happening in the economy and by the FED and US Treasury.

Another possible future is a BIG decline in the Dollar.  The Dollar has been going down for the past 4 weeks.  The recent upward Dollar movement at the beginning of this year was a “head fake” and was caused by the panic in Europe.  However, the Europeans are “talking” about reducing spending, and the US is talking about increasing its spending; so people are voting with their feet by selling the Dollar.  If the Dollar starts to fall dramatically, then energy and food will increase dramatically, and everyone in the US will be hurt.
 
Here are the last numbers for today:
Dow Jones 30 Industrial – 10,230 (up 76)
10 Year Treasury Bond – 2.93% (down 0.03%)
Euro – $1.2892
Gold – $1192 (up $10)
Oil – $77.44 (up $0.90)
Gasoline – $2.08  (up $0.02)

Mostly sideways action today.  Stocks tried to rally, but IBM came in at the end of the day with poor earnings.

Gold is testing key support levels at $1180 and $1178.  While they went to $1176 today, they bounced off those lows – successfully testing these points.  Let’s hope for a big bounce, and the big banks don’t sell again as they have been recently.

In the news today……

Ireland creditworthiness – was downgraded one notch by Moody’s today.  The credit rating companies are more on the ball now that they got caught with their hand in the cookie jar back in 2008.  Greece, Spain, Portugal and now Ireland have been downgraded.

IMF and EU stop talks with Hungary – as the Hungarians are playing hard ball in the negotiations with the IMF for a bailout.  The IMF is holding all the cards, so they just pulled out of the talks, and that froze the $25B that was already approved for Hungary to use – leaving them high and dry.  Saner minds should prevail in the near term, but if they don’t this could be another run on the Euro and scare lots more people.

IMF wants more money – and they only want another $250B so they can bail out countries around the world with money.  This is just as inflationary as the US printing money by the FED, or the Quantitative Easing performed by the Europeans.  Also, the majority of IMF money comes from the US, so actually it is YOU bailing out the rest of the world, and you don’t have a say in it either.  I bet you have never voted for anyone in the IMF – have you?

Lehman Bros – when it was about to fail, it was hiding its bad assets in off-balance sheet transactions – and the surprise was that the French Central Bank was helping Lehman Bros.  No one knows why the Bank of France was acting that way – yet.  Sounds screwy to me, but that just means I don’t understand who was making money on this deal.

States have Budget Shortfall – and it is about $196B in 2010 in total.  What will they do about it?  That’s a great question, but the answer will be painful – that I am sure of.  Here is a chart of the states, and how they are doing.

Tonight’s Dinner Conversation…..

Marc Faber is a pretty good judge of our economy.  He is predicting that the FED will be implementing a massive Quantitative Easing action this fall.  I suggest you watch the video of him talking at:

http://noir.bloomberg.com/avp/avp.htm?N=adviser&T=Faber%20Sees%20Fed%20Introducing%20%60Massive’%20Quantitative%20Easing&clipSRC=mms://media2.bloomberg.com/cache/vngguPxIaYKk.asf

 
Here are the last numbers for today:
Dow Jones 30 Industrial – 10,154 (up 56)
10 Year Treasury Bond – 2.96% (up 0.02%)
Euro – $1.2937
Gold – $1182 (down $6)
Oil – $76.43 (up $0.42)
Gasoline – $2.06  (up $0.01)

Stocks are beginning their crumbling phase.  Down, down, down……

Interest rates remain low, as people still have some faith in bonds, but actually I think they are stupid in a way, as they don’t know where to put their money when they sell their stocks.

The Dollar is tumbling.  Why?  Well, the FED said that it might take 6 years for the economy to recover, and this truthful statement took the world’s breath away.  So, this is the real reason that the Euro is climbing back up from $1.20 to $1.29 in the past week plus.

Gold is getting beat up, but is holding its own.  It fell again today, and is in the buy range now.  If it stays there on Monday, I think it will be time to buy some more.  The key price point to watch for gold is $1215.  There is a determined seller of gold that comes into the market at that price, and keeps knocking it down.  When it breaks above $1215, it will be going up much higher.

Oil/gasoline just move sideways – not knowing what to think about all the shinanigans going on in the Gulf and in politics.  You would think that oil would fall as the US in on the precipice of a double dip recession (aka Great Depression 2).

In the news today……

Financial Reform Bill Passes – and YOU will pay for it.  You thought this was a bill that would protect you from the excesses of Wall St – right?  Well, it does some of that, but the Congress also put a LOT of sneaky things in there that will cost you a lot of YOUR money too.  You know you can’t trust those scumbags.  Well, here is just one example:  Small banks – those banks that didn’t really contribute to the financial meltdown in 2008 – are being overly regulated now, and must spend a lot of money to meet new bureaucratic requirements (like having a “Compliance Officer”).  How do you think the banks will pay for these additional costs?  Easy!!!  They will just raise your charges and lower your services.  Happy?  If so, write your Congressman/woman and thank them.

If the previous diatribe sounds like a rant – it is.  Politicians think they must sneak in everything they ever wanted under the Christmas Tree.  They can’t concentrate on the major things they are supposed to be getting done, and just do those things.  Remember to vote in November, and vote often.

Tonight’s Dinner Conversation….

The economy stinks – right?  Well, why do I say that?   Here are the main reasons:

1. Unemployment remains high – with no solution in sight.
2. Housing continues to looks dismal – and is set to fall in value again.
3. Congress continues to spend like a “drunken sailor” – and there is no end in sight.  This makes the majority of Americans afraid for their future.  They are reducing their spending as they lose confidence in our economy.
   

Take a look at these graphs, and see what conclusions you reach…..

See how persistent the unemployment rate is?  See how we are fed a bunch of lies about how many people are out of work?

The number of Mortgage Applications is falling, and has been for quite awhile.  There doesn’t seem to be any respite for the wicked housing market.  We had a recent spike in applications as the government interfered with the market by offering a tax break to new home buyers, but this has fallen away quite rapidly, and the downward trend of applications continues.  This translates into fewer houses sold.  As you know, we are having many more houses coming on the market throught the foreclosure process as record number foreclosures take place.

You can see that foreclosures just don’t look healthy in the US.  And, I predict this bad trend will continue throughout 2011.

Retail sales picked up after the 2008 economic crisis as the stimulus money kicked in – BUT, it is now turning negative once more. This is the double dip recession looking at you straight in the face – as retail sales represent the MAJORITY of US GDP.

So, now that you’ve seen some facts, what conclusions do you come to?  I want each of you to come to your own conclusions about our economy.  With your conclusions, you will be able to protect your assets much better than if you dig a hole, and put your head in it.  Don’t hide; the economy will bite you wherever you are.

Here are the last numbers for today:
Dow Jones 30 Industrial – 10,097 (down 261)
10 Year Treasury Bond – 2.94% (down 0.04%)
Euro – $1.2927
Gold – $1188 (down $20)
Oil – $75.83 (down $0.79)
Gasoline – $2.05  (down $0.01)

Hello Economyguy Readers.

I have been out of communication while my wife and I have been making major changes in our life by selling our big home.  Lots of chaos, and lots of moving.  We want to create a bohemian lifestyle where we can travel from place to place for a few months at a time, and enjoy different cultures.  Now that sounds nice, but try to get through the bureaucracy of creating a post office box and change of address at the same time – sound simple?  It isn’t, and I won’t elaborate.

To catch up for the past two weeks, I will provide a narrative of what’s happened, and how that impacts you.  

The Markets

Stocks tanked, and then recovered for the past 6 days.  Today was the turning point for the stock market.  The fundamentals are being dictated by the earnings reports of companies currently coming out.  Could be interesting.   The technicals are “bearish”.  Stocks have hit a technical confirmed bear market, and this should be negative for stocks.  Assuming this bearish stock indication is correct, it foretells a double dip recession.

Treasuries have been telling another story.  Interest rates for the 10 Year Treasury fell to about 2.9%, and have now recovered up to over 3%.  The lows produced extremely low mortgage rates for you who needed to refi.  Where did this move come from?  It came from the European (Greek and Spanish) debt crisis, and people pumped money into Dollars, and bought the strongest instrument on the face of the earth – the US Treasury.  (How long will that epithet last?  That is a story for another time.)  

The Euro (the anti-Dollar) fell to as low as 1.20/$, and has now significantly recovered to 1.27/%.  Remember that it fell from about 1.5/$ – so it has a long way to go back to.  And, why would anyone with a sound mind want Euros?  Well, something who thought that the Dollar might fall, would want Euros. The Europeans have actually tried to constrain their spending – while not in extremes – it is a good start to stem the excess spending and excess debt.  The US is not doing anything like that, and it is apparent that the Dollar is being tarred and feathered in the foreign exchange market right now.  But, maybe the Euro is just having a technical rally because it fell off a cliff from 1.4/$ to 1.2/$.  Time will tell.

Gold fell from about 2240/ounce to as low as 2190/ounce, and has recovered a little to 2207 as of today.  I personally still believe in gold, and see the current hiatus as a technical movement as the rapid move up has been breathtaking.  I see a bright future for gold over the rest of the year.  July is the slowest month for gold price growth historically.

Oil and gasoline are showing the weakness in the Dollar by staying exactly where they were two weeks ago.  Gasoline has fallen a little, but oil is stable – even with the Gulf Oil spill and the possibility of less drilling in the near term.

The Economy

Where to start….  Unemployment is still very high, and new job growth is dismal – that is the best word that I can churn up for what’s going on.  No one likes that fact we are not growing jobs.  Greenspan has stated that factories have stopped their inventory rebuilding program, so that means that factories are not producing as many goods as they did the first to quarters of this year.  A slowdown in other words.  Stimulus spending has stopped, and is on hold as politicians are holding back on stimulus spending until the year 2012 when there will be a Presidential election.  No more housing stimulus money, No more auto stimulus money.  No more unemployment money for those who received it for long periods (90 months?).

The government continues to spend like a drunken sailor.  Deficits are reaching to the stars, and this will end badly for America.  As a tidbit, HUD has a program where they are giving $196M to governmental organizations (like cities) to buy houses on the HUD books at a 25% discount (watch out for appraisal shocks coming into the market place) so that we eliminate homelessness.  Imagine that.  The government is giving money to buy their foreclosed houses, and get them off the books – sounds like it could be illegal if a private citizen did it.

States and counties and cities are busting their budgets and creating deficits that they MUST reel in.  That will mean some hard decisions with respect to employment and services.

All this portends that we are going into a double dip recession, and it will be happening right NOW.  The second half of 2010 doesn’t look pretty.  2011 isn’t much better – or could be even worse.  

Politics

We are in an election year, and posturing is the norm.  Lots of words, and you can’t believe anyone.  So, think before you vote.  I still recommend voting out all incumbents.

The biggest bill coming forward is the Financial Reform Bill – and this was written by the Democrats in control, and it hides lots of ugly partisan sections.  It is flawed massively.  Just get mad when it passes, and vote out the scumbags who are responsible.  Are there some good section?  I don’t know because I haven’t read it – but , what’s new – none of the senators or folks in Congress have read it either.

Did you know that some of the Healthcare legislation is still be revealed – even though it’s law today.  Like a provision for all financial transactions over $600 to documented to by a 1099 form.  Why?  Well, some of the better minds out there say it is to easily enact a VAT, and know all the transactions that it will apply to. Just to put the record straight – I am AGAINST a VAT tax in America.  Everything will jump up in price immediately, and you will see instant inflation – and I can tell you today, and no one will like it.

Here are the last numbers for today (and changes from yesterday):
Dow Jones 30 Industrial – 10,367 (up 4)
10 Year Treasury Bond – 3.05% (down 0.01%)
Euro – $1.2743
Gold – $2207 (no change)
Oil – $76.60 (down $0.44)
Gasoline – $2.07  (down $0.02)

I am in the midst of a trip, and also moving out of our home in Tucson.  Sorry for the lack of economyguys, but nothing much is happening other than gold is going up, of course.  I am happy.  Here is a short one to educate you on a little history.

Roman Inflation – so you thought we were the only folks to have inflation?  We’ll the Romans copied someone else, and they did it the old fashioned way. L They had silver coins as their money, and when they needed more money, they brought in all the coins, melted them down, added some base metal (like lead or tin) and reissued the coins.  Here is a chart showing the percentage of silver in these coins over the years.

You can see that the Romans were typical politicians, and nothing is new under the sun.

So, let’s look at how bad this inflation in money (or decrease in silver in each coin) actually inflated the prices of things.  Well, if you look at this downtrend, you will see that there was roughly about 1/5% decrease in silver each year, on average.  And this lasted over 150 to 200 years.  Wow.  These guys were pros, and our politicians could learn something from them.  Here is my conclusion:

1. The Romans weren’t gluttons for inflation – it was only 0.5% each year.
2. The Romans decreased the value slowly so the people in any generation (you didn’t live that long back then) didn’t really see or feel what was happening.
3. Today’s American politicians are decreasing the value of money (inflating our money) about 2 to 3% each year.
4. Americans live longer, and can certainly see and feel the decrease in the value of money.  American politicians are gluttons.
   

And, to further show that things aren’t really changing in our world, from the Roman world, here is a quote:

And, lastly, to put to rest the rumor that gold is a bubble today, here is a chart comparing some real bubble to the gold price action today.  Just look at the chart.  It speaks very lously.

Stocks were down most of the day based on fears in Europe, but ended up 24 at the end of the session.  Interest rates fell as money flowed into the safety of US bonds.

The Euro gained today and is a strange phenomenon.  Perhaps were are seeing the end of a short squeeze on the Euro being played out.

Oil and gasoline at showing strength with oil down a little, and gasoline up a little.

Gold touched its ALL TIME HIGH today, and is continuing to show its very strong bullish move upward.  It is poised to move higher, but markets will do whatever they want to do, and there is a lot of manipulation in the gold market.

In Today’s news……

Missile Defense – is being negotiated very quietly with the Russians right now.  Do you hear about it on the news?  I doubt it.  The Administration doesn’t want you to know that they are giving away your protections.  The delegation representing America believe sthat our Missile Defense systems don’t work, and can’t work, and are willing to give anything away that doesn’t work.  They have stated that missile defense is a barrier to negotiating a comprehensive nuclear peace deal with the Russians.  What fools!!!!  Missile defense is a defensive system and isn’t a threat to anyone.  It shoots down an enemy’s missiles.  How can that be threatening?  Of course it is a barrier to the Russians.  The Russians don’t want our system to be able to shoot down them hydrogen bombs aimed at the USA.  If we give away our missile defense crown jewels, we will be going back to the MAD (mutual assured destruction) days of a nuclear standoff.  The Russians liked that much more because they were “equal” those days.  Today, they are in a disadvantaged position.  If they shoot at us, and we shoot down their missiles with our missile defense system, they will lose a nuclear war.  Remember that Reagan bankrupted the old USSR with Star Wars which was the beginnings of what works today.  It was a dream then, and didn’t work; but we could outspend the Russians, and bankrupt them.  Ergo Russia emerged from the USSR – but remembered.  I have strong feelings about being sold down the river by the Administration.  I have worked on the missile defense system of the US and talked to the Missile Defense Agency officials as well as officials of many of our allied nations.  The military knows that missile defense is the real thing.  What’s wrong with our Administration?

UK complaining – in the form of the UK Prime Minister Cameron that BP is stopping its dividends, and this could hurt UK pensioners.  This is a nation trying to defend its industry (something that is actually refreshing).  However, Americans can view this as a tit for tat taxing of each other’s companies.  Last month, the UK imposed a massive tax on banker’s income in the UK, and this will have an impact of the profits of US banks operating in the UK; banks such as Bank of America, Citigroup, etc (which I don’t have much sympathy for).  The profits of these banks will be reduced by approximately 10% (or a total tax of $2B on US banks) by the imposition of the tax on bankers operating in the UK.  So, they tax us, and we tax them.  Well, it’s not a tax in reality from the BP side, but it has the same effect.  

Jobless Claims – rose to 472,000, and this was a “surprise to the experts” to the upside.  I ask you to ask yourself about the expertise of the experts when they are surprised so much.  Perhaps they are just shills for the Administration????  Why do we get such rosy projections and predictions from the mainstream news and the government – when it is obvious the future has some major bumps in the road??  This increase in the jobless claims is showing VERY CLEARLY that we don’t have a robust jobs market.  Our experts said the economy was creating jobs, and all the jobless rate had to fall to was 426,000 to get to this “job creation” state.  Well, what are they saying today??? As an example, Wynn laid off 250 people from his Las Vegas luxury hotels to save about $8M annually – and you think things are looking good in Las Vegas?  Wynn recently came out blasting the Administration and all its wishy-washy rules that change every minute – making running a business and planning for the future virtually impossible – so he is investing in the Far East (like Shanghai, Macau, etc.) and not the US right now.  Businesspeople are voting with their feet if they have the ability to vote that way.

Private Sector Jobs Created – 214,000 in April and 41,000 in May – is this the trend that looks healthy to you?  Of course, let’s not forget to count the government jobs created in the Census, as they count us.  Those jobs will disappear quickly, and are bogus to begin with as the government lies about its job creations to make you “feel” comfortable in this turmoil.

CPI – fell 0.2% last month.  This is a sign of deflation.  The “core” rate rose slightly when you strip out energy and food – but we must use energy and food, so I don’t like to talk about stripping anything out.  The basket making up the CPI measure is suspect as it is.  Oh, by the way, energy has turned around, and you can expect those cost reductions to disappear this month anyway.

91 Smaller Banks – missed their TARP payment last quarter.  The number of banks missing their quarterly required payments is increasing each quarter.  But, I hear you say “But, the big banks repaid their TARP – so what’s the problem?”  Well, that’s true, as the FED favors those big banks and has given them zero interest money to earn their way out of their mess (good luck), and the FED didn’t do that for the small banks.  But, how big is this problem?  Maybe it isn’t a big deal!!!  Well, all small banks borrowed $130B in total.  This is about the same amount loaned out to the big banks.  That is the amount of money that is at risk.  Not only are we, the taxpayers, not getting the interest on those loans, we are at risk of never getting back the principal – but, so what’s new, as I warned about that when TARP was first handed out to the pals of the Administration.

Spain – continues to deny it is asking for a bailout from the EU and IMF, but rumors persist – and I believe the rumors.  Spain must roll over billions in bonds this year, starting next month, and interest rates have risen about 2.5% for Spanish bonds since the crisis began.  Why do I believe a bailout is in the offing?  Because the majority of the debt is owned by German and French banks who can’t afford to have a default on those bonds – and a bailout would mean they would get their principal and interest back.  Self interest always rules – and this is all high politics.  What could be the downside of all the higher interest rates and decreases in government spending in Greece and Spain and Portugal?  These countries are used to military coups and civil unrest – and either or both could happen.  Not a really rosy picture.

Tonight’s Dinner Conversation…..

US Treasuries – let’s move on in our discussion of things that directly affect your financial wealth position now and in the future.  US Treasuries is one of those, and most people are just not aware of the massive impact they have on their lives.

The San Francisco FED came out with a paper this week that stated that the FED would not be raising rates until 2012.  While the San Francisco FED bank doesn’t speak for the FED as a whole, it does carry a lot of clout, and the new Vice Chairman of the FED is the current head of the San Francisco Federal Bank.  So, there must be credibility in this report.  So, my question to you is “Why 2012, and not sooner??”

You see 2012 is after 2010 and 2011.  In fact, 2012 starts 18 months from now, and lasts to 30 months from now.  If the US economy is so robust, and creating jobs at a great clip, and growing company profits rapidly, and paying more taxes to the government by creating all the new wealth, then why would the FED be waiting 18 to 30 months to raise interest rates?  

I believe the answer is simple.  The FED is very smart.  The FED can predict the future of the US economy better than any other body of experts in the world as it has more information to work with.  The FED does not announce what the future holds for the US economy – it keeps its secrets well hidden so as not to impact the markets.  So, the simple answer is that the FED believes the US economy is not going to recover quickly as everyone else is saying.  The FED believes we are going to have a level economy, or perhaps an economy going back into recession during 2011.  In that scenario, the FED would keep interest rates at ZERO.  If the US economy was heating up, the FED would RAISE interest rates.

So, now you know what the FED really thinks about the future US economy.  This is Logic 101.

Okay, let’s accept that.  What about all those “bond vigilantes” that I talk about so much?  Where are they?  

The bond vigilantes are alive and well. You are seeing them in action over in Europe right now with Greek and Spanish bonds.   The bond vigilantes have more targets than just the FED Funds Rate – and in fact, they can’t really impact the FED Funds Rate  as it is set by the FED; but, the vigilantes could strongly encourage the FED to raise rates if they had a run on longer term Treasuries (5 year, 10 year, 30 year, etc), and those rates rose dramatically.  In addition to the bond vigilantes there are big governments who own US Treasuries and could threaten to sell, or actually sell them, and demand higher interest rates (in fact, you could call these big governments – bond vigilantes too).  In addition to US Treasury bonds, bond vigilantes watch over all bond rates – like corporate bonds, municipal bonds, junk bonds, etc – and when something is smelly, they jump in and sell those bonds causing their interest rates to rise.  So, if there are large changes in interest rates in any class of bonds, you probably are seeing bond vigilantes in action.

How can you make money with bonds?  What bonds are best to make money with?  Great questions.  Here is the answer that I’ve come up with for myself.

I will wait until bond interest rates start rising.  This could be signaled by the FED raising the FED Funds Rate, or it could be signaled by longer term Treasury interest rates rising.  I report on the 10 year Treasury interest rate in every economyguy – because this keeps me up to date on what’s actually going on in the bond market.  The 10 year Treasury is currently around 3.3%.  If and when it reaches 4%, I will get much more interested in the possibility of betting that interest rates are going up.  When it reaches 4.5%, I will probably start worrying that I am missing the interest rate rise phase of the market.  However, I also watch other bond markets to see what they are doing with interest rates as well.  I would expect the junk and low quality bond markets to start rising in interest rates before the 10 year Treasury interest rate takes off.

When I feel confident that interest rates are going to rise for the foreseeable future, I will start a program of shorting bonds.  Which bonds?  Well, I will look at all bond markets, and see which ones have started to rise in interest rates, and which ones haven’t.  I will pick a variety of markets that have started or will begin to rise.  However, this decision must be made in conjunction with maintaining total awareness of the news driving all markets.  For example, if China decides to sell bonds, then Treasuries will shoot up in interest rates, and could lead all other bond markets.  

Hope this helps in your education and understanding.

Here are the last numbers for today:
Dow Jones 30 Industrial – 10,434 (up 24)
10 Year Treasury Bond – 3.19% (down 0.12%)
Euro – $1.2388
Gold – $1248 (up $18)
Oil – $76.60 (down $1.07)
Gasoline – $2.16  (up $0.02)