Wednesday, May 14, 2013 - Crumbs and Curds

Financial Review with Sinclair Noe

DOW – 101 = 16,613
SPX – 8 = 1888
NAS – 29 = 4100
10 YR YLD - .07 = 2.54%
OIL + .37 = 102.07
GOLD + 11.00 = 1306.70
SILV + .22 = 19.85

The days of milk and cookies can be fleeting; one day the world seems sweet and creamy, and the next day you’re left with nothing but crumbs and curds. The Russell 2000 index of small and mid-caps, dropped 1.6% falling below the 200 day moving average; since hitting a high in March the Russell is down 8.7%. The Dow Jones Internet Index has plunged 17% from a 13-year high in March.

There is a strong tendency among the Wall Street hype-sters to “buy the dip”, with the pitch being that if stocks plunge, it’s really just a buying opportunity if you are patient. What they don’t say is that it is almost impossible to be patient if you run out of capital, but putting that aside, the stocks will all come roaring back someday. Yea, I’m not going to tell you that. Some stocks will recover. Some stocks don’t come back.

Here’s a quote from a Citigroup analyst’s note to clients: “We believe the recent pullback represents a particular opportunity among large cap Internet stocks, with multiples having retraced to levels not seen for more than two years, with no/little change in fundamentals, and with investment profiles that sync well with what portfolio managers are seeking in today’s market.”

Among the favorite downtrodden internet stocks: Facebook, down 18% from its high; LinkedIn, down 43%; and AOL, down 31%, seriously I was surprised to learn that AOL still trades. I would have thought that anybody who lived through 1999 would have shunned AOL permanently. Did we learn nothing from the dot.com days? Certainly the Wall Street analysts learned nothing; they rode the market all the way down back in the day, all the time screaming “buy, buy, buy.” I’ll say the same thing I said back then, you can’t go broke taking a profit.

Treasury bonds rallied. The yield on the 10-year Treasury note touched 2.523% at one point, its lowest level since Oct. 31. While today’s move had all the markings of a short squeeze, the storyline is that the European Central Bank will pump more liquidity into the economy next month. Bank of England Governor Mark Carney signaled there is no rush to raise interest rates after the bank left its growth and inflation forecasts broadly steady in its latest inflation report. And Federal Reserve Chairwoman Janet Yellen said last week that the Fed would continue to keep interest rates near zero for a considerable period to support the economy and inflation remains low. Yellen is scheduled to speak tomorrow.

Today we had a report on inflation at the wholesale level. The Labor Department’s Producer Price Index, or PPI, increased 0.5% in March. The PPI was overhauled in January for the first time since 1978, largely to include services such as retail, health care and financial advice. Previously the index only looked at the price of goods: food, energy, housing and the like. That makes sense, but it has also lead to some wicked wild spikes and dips in the PPI. More likely the CPI, prices at the retail level, are more accurate, running in the range of 1.5% annualized rate.

There’s just something about the bond market that doesn’t feel right. Rates should not be dropping if the economic recovery is really underway. If the first quarter was a weather related aberration, and the second quarter is bouncing back, rates should not be dropping.

After ending 2013 at 3.03%, 10-year Treasury yields have declined 50 basis points year to date. Sovereign yields have collapsed throughout Europe and have generally fallen around the globe. What's behind the decline? Are there potential ramifications for stocks and the global economy? These are critical questions, especially considering the bullish consensus view of accelerating US and global growth.

The Ukraine crisis likely marks an unfortunate end to an era of global cooperation (of a sort) and a return to Cold War tensions and risks. Geopolitical risks exacerbate the vulnerabilities of financial market excesses. And the global central bankers’ response to the collapse of 2008 has resulted in trillions upon trillions of dollars of mispriced financial assets and ever greater leveraged speculation. When the Fed was pumping $85 billion a month into the markets - that was not de-leveraging. With QE winding down, there is impetus for the leveraged speculators to take more risk averse positions; toss in a geopolitical flare-up and greed transforms to fear.

Former Fed Chairman Alan Greenspan was speaking at a financial summit in Washington today and he said that current calculations of the federal government's budget deficit and fiscal outlook understate the risk of long-term trouble, because they do not take into account such "contingent liabilities" as the risk of a major Wall Street bank collapsing. Typically, deficit hawks invoke the phrase "contingent liabilities" to call for cuts to Social Security and Medicare, arguing that official government accounting understates the long-term taxpayer costs of such programs. But Greenspan didn't make a hard pitch on entitlement cuts, focusing instead on the risk of bank bailouts.  

Bond prices are going up nonetheless because the big money is seeking a safe haven in a gathering storm.

Europe’s highest court Tuesday gave people the means to scrub their reputations online, issuing a ruling that could force Google and other search engines to delete references to old debts, long-ago arrests and other unflattering episodes. Embracing what has come to be called “the right to be forgotten,” the Court of Justice of the European Union said people should have some say over what information comes up when someone Googles them.

The decision was celebrated by some as a victory for privacy rights in an age when just about everything, good or bad, leaves a permanent electronic trace. Others warned it could interfere with the celebrated free flow of information online and lead to censorship. The ruling stemmed from a case out of Spain involving Google, but it applies to the entire 28-nation bloc of over 500 million people and all search engines in Europe, including Yahoo and Microsoft’s Bing.

Google is already getting requests to remove objectionable personal information from its search engine. Europeans can submit take-down requests directly to Internet companies rather than to local authorities or publishers under the ruling. If a search engine elects not to remove the link, a person can seek redress from the courts.

The criteria for determining which take-down requests are legitimate is not completely clear from the decision. The ruling seems to give search engines more leeway to dismiss take-down requests for links to webpages about public figures, in which the information is deemed to be of public interest. But search engines may err on the side of caution and remove more links than necessary to avoid liability. Google has said it is disappointed with the ruling, which it noted differed dramatically from a non-binding opinion by the ECJ's court adviser last year. That opinion said deleting information from search results would interfere with freedom of expression.

Some limited forms of a “right to be forgotten” exist in the US and elsewhere, for example, in regard to crimes committed by minors or bankruptcy regulations, both of which usually require that records be expunged in some way.  And some things probably are better off forgotten.

In 1897 silver and gold dealers-slash-bankers in London began gathering each day to post their metals prices. They would meet in a basement and compare prices and then average prices and come up with something called the “fix”. There was a morning fix and an afternoon fix for both gold and silver. This became the price for precious metals. There has long been speculation that the bankers who set the fix might occasionally alter the prices to suit their own trades, in other words the fix was rigged and manipulated.

The basic price setting formula worked well for the bankers and it was adopted by the Libor and the Forex and the ISDA and others who liked the idea of controlling prices for a major market. Turns out the Libor and the Forex and other markets were indeed manipulated, and investigations are ongoing. And then the regulators got the bright idea that if all those markets were rigged, maybe the original, the gold and silver fix, maybe they were rigged. Investigations are underway. 

And so Deutsche Bank has decided they don’t want to be part of the London silver fix. They have announced they are resigning their post effective as of August 14, 2014. That leaves just two primary dealers to set prices for silver, HSBC and Bank of Nova Scotia; not enough to matter; and so the London Silver Fix will close down. The London Gold Fix will continue for now, but by the middle of August there will be no more London Silver Fix. And all of the banks that continue to trade in silver will have to find new ways to rig the market.

People used to think price manipulation in major markets never occurred. More evidence today, Bloomberg reports on a research paper that uncovered evidence that some traders got early news of Federal Reserve rate announcements and then traded on it during the Fed’s media lockup. The paper, covering September 1997 through June 2013, detected abnormally large price movements and imbalances in buy and sell orders that were “statistically significant and in the direction of the subsequent policy surprise.” The moves occurred during the window between when Fed announcements were supplied to the news media and when they were permitted to be released to the public.

The researchers calculate that the traders made off with somewhere between $14 million and $250 million in aggregate profits. A spokesperson says the Fed “enhanced its media release security procedures” last October “to better protect the information against premature release.”

QE III: Pushing On A String

Initially, the stock market interprets inflation as a positive, as price increases on goods sold fall to the bottom line. Subsequently, rising costs wipes out all benefits of inflation to companies.

It has now been two weeks since Ben Bernanke announced that he would join European Central Bank President Mario Draghi in unleashing unlimited printing at a monthly rate of $85 billion dollars to save the economy [read asset prices] from further deterioration. Unfortunately, the cure does not match the true disease.

The S&P 500 Index closed September 27, at 1,447.15, up 13.83 points, but, lower than the September 13 close of 1,459.99, when the Federal Reserve Board Chairman held his news conference. Thursday's price action was achieved with the market positively and enthusiastically embracing a spotty economic report, the announcement of a new budget by Spain, and the news item that China had injected more stimulus money into its softening economy.

The nominal effect is tantamount to pouring a third cup of Starbucks coffee down a drunk to sober him. Actually, evidence of diminishing returns from various stimuli programs had been seen in earlier macroeconomic data.

The Commerce Department reported Thursday orders for goods meant to last at least three years, excluding demand for airplanes and automobiles, fell 1.6% last month after a 1.3% decrease in July. Total bookings plunged 13%, the most since January 2009, attributed to a decline in demand for civilian aircraft.

Also reported by the Commerce Department, the U.S. economy expanded at a 1.3% annual rate, the slowest pace since the third quarter of 2011 and down from last month's 1.7% estimate.

The Labor Department said new claims for unemployment benefits fell to 359,000 last week from an upwardly revised 385,000 the week prior. Claims were expected to fall to 378,000 from an initially reported 382,000.

Helping the upbeat mood of the market on Thursday, according to CNBC, China's central bank injected a net 365 billion Yuan ($57.92 billion) into money markets this week, reportedly, the largest weekly injection in history.

Mr. Bernanke promised to keep interest rates down for institutions and mortgage seekers by purchasing mortgage-backed securities at the expense of savers. This program ignores altogether other forms of outstanding debt weighing down consumers such as revolving and non-revolving lines of credit and student loans, which now stand at over one trillion dollars.

According to a Pew Research Center analysis of newly available government data published today, 19% of the nation's households owed student debt in 2010, more than double the number in 1989, and more than 15% that owed student debt in 2007. The Pew Research analysis also reported that 40% of all households headed by someone younger than age 35 owe such debt.

Some of the more salient statistics from the Pew research analysis include; the average outstanding student loan balance increased from $23,349 in 2007 to $26,682 in 2010. Most debtor households had less than $50,000 in outstanding student debt in 2010, but the share of households owing elevated amounts has increased.

In 2007, 10% of student debtors owed more than $54,238. By 2010, that number had risen to more than $61,894. Interestingly, average household indebtedness fell from $105,297 in 2007, to $100,720 in 2010.

Every remedy seriously discussed and/or enacted since 2008 by the federal government or the Federal Reserve Bank in the wake of the Great Recession has been a top-down solution. Most of the problems Congress, the White House, and the Feds addressed required a bottom's up approach to succeed long-term in helping Main Street. Avoiding this reality, addressing total household debt servicing requirements and a sharp drop in disposable income, was at the core of their failure in rescuing the economy.

Case in point, real estate; Washington DC, pushing trillions of taxpayers' dollars through the banks over the last four years, hoping that the dollars would find their way to individual mortgage borrowers and rehabilitate the national economy, has proven to be a squander of time, effort, and resources, given the skimpy results.

A simpler and more effective approach would've been for the government to utilize the treasury auction one time to issue $50 billion in 30-year bonds, with a 3% coupon, and refinance 250,000 mortgages at $200,000 each month. Over the last four years millions of home owners would have been better served with this approach and at a fraction of the cost to taxpayers, versus the many cumbersome and failed homeowner relief programs Washington tried.

Instead we are being tortured with an L-shaped recovery, consisting of lethargic growth, flat tax revenue receipts, and stubbornly high unemployment figures, unknowingly, for as far as the eye can see.

What about those underwater mortgages? Any difference between the original mortgage amount and the newly appraised value of the home could be split from the new mortgage (as in a second) and would become a tax obligation to the borrower over 30 years.

With this approach, many of the tens of thousands of entrepreneurs that went out of business in 2009 and 2010 would have found their shops located in neighborhoods with homeowners struggling less, or not at all, making their mortgage obligation and finding a few hundred dollars extra each month in their pockets to spend.

Lastly, making these new mortgages assumable, as in days gone by, and GNMAs, would have given the real estate market natural buoyancy during a period of free fall. Backed by the full faith and credit of the U.S. government, institutions could then legally purchase this new debt.

This bottom-up rescue would have lowered borrowers' monthly mortgage payments, paid off the original mortgage, saved bankers (they got the money, anyway) holding dubious collateral, and preserved contract law, while stimulating the economy.

The dollars' velocity would be rising instead of falling at this point in time in this recovery. More importantly, by quickly reducing the amount of debt per household and increasing household disposable income in the darkest days of 2009 and 2010, the true disease afflicting consumer spending then and today - lack of demand from truncated disposable income - would have significantly reversed that deficit.

Besides, the government had already guaranteed some 3 trillion dollars in money market funds in the dark days of 2008, so, did it matter if this money was guaranteed before or after it entered the bloodstream of our financial system?

But I digress.

Applying traditional economic stimuli to a changed economic system we are now learning is unproductive. The superstructure of the western financial system, forged during the depths of the Great Depression, has mutated over the past 30 years by a shift in political and social culture, financial product innovation, and retirement planning choices.

Since 2008, the post-World War II economic and financial ecosystem has been completely modified by both governments and their central banks and corporations, during crises after crises, to the benefit of industry and corporations, and at the expense of national economies and individual households, worldwide.

The 70% consumer driven U.S. economy, the world's largest single economy, is a product of the 20th century. The economy has not responded robustly to QE I, QE II, Operation Twist, and now, so far, to QE III, as policymakers apply outdated remedies for an economy that no longer exists.

The economy has, however, drifted listlessly, from misdiagnosing and mismanaging treatment. Archaic monetary policy tragically is, ultimately, unproductive in guiding outcomes desperately being sought by politicians and economists. We are traveling down a new economy road without a road map.

For long-term investors, there is no mystery to the disease afflicting the U.S. economy; we are living in a complex world plagued with 21st century globalization. The extreme ends of inputs for the marketplace to create opportunities, produce output, and generate wealth, are in fundamental conflict with each other and our expectations and sensibilities imported from the 20th century.

Whether the conflict is over wealth accumulation, labor and productivity, return on capital, education, natural resources, innovation and technology, or geopolitical rights of ownership, this clash between the past and the future economic systems will establish along the way new winners and losers.

Once upon a time, there was a financial theory called a business cycle. It quantified economic activity, measuring and marking its circumference from trough to peak to trough as one complete revolution. And, from this business cycle winners and losers were recognized by the marketplace. Somewhere along the way, we discarded the notion of recession as a natural and healthy part of this business cycle.

Historically, whenever central banks began pushing on a string with monetary policy, attempting to stimulate demand where none naturally exists, first stagflation, then inflation, occurs. This develops whenever the marketplace is prevented from deciding winners and losers.

Initially, the stock market interprets inflation as a positive, as price increases on goods sold fall to the bottom line. Subsequently, rising costs wipes out all benefits of inflation to companies.

The 32 year-old bull market in bonds is in its final weeks. The policies that set it in motion three decades ago, compelling interest rates to fall - no tolerance and complete vigilance to fighting inflation, are no longer recognized as prudent policies. The consequences of loose monetary policy can be seen appearing on the horizon.

Around the world, governments are struggling, in varying degrees, with escalating inflation from drought, scarcity of supply, debased currencies, and local conflict and violence inhibiting the free flow of goods.

How long can the U.S. bond market avoid these realities going forward is anyone's guess. At some point, however, bond investors will stare into the abyss recalculating risk and the time value of their money.

The unprecedented amount of funds that have flowed into fixed income investments since 2008 will reverse and regrettably, take many, sophisticated and unsophisticated investors alike, out to sea as the tide rolls away.

This summer's rally began June 4, at 1,278.18, which was induced by horrible May economic data, thus, anticipating QE III. Now that unlimited quantitative easing has arrived, central banks around the world are all in, where will the economy and fundamental global change take the market and investors' capital next?

To seek higher investment ground, investors should reduce exposure to fixed rate income investments and begin looking for variable rate fixed income products for long-term income. Also, the stocks to consider, if you must buy stocks, are essential companies such as: AT&T (T), Verizon (VZ), Google (GOOG), IBM, Exxon Mobil (XOM), Chevron (CVX), Disney (DIS) and Microsoft (MSFT), core companies that will only go out of business if society ceases to function as we know it today.

As inflation rises, it will be hard assets including gold, up 6.4% for the month and for the quarter 14.6%, and silver, up a sparkling 12.2% for the month, and for the quarter over 31.5%, farmland, natural resources, energy, companies that manage the new digital world and essential basic services, that cannot be re-produced on two-dimensional printers, which will retain their value.

SPY Gains of the XXX Olympiad

The stock market has given us over the past six weeks all the thrills of a summertime Six Flag amusement park ride. This serrated performance of risk on/risk off greed and fear rests upon the painful to watch unraveling of the European Monetary Union (EMU).

Now headlining the limited engagement of sovereign surrender of the old country to Germany is Spain. From CNBC, Wednesday night, Moody's Investors Service cut its rating on Spanish government debt by three notches on Wednesday from A-3 to Baa-3. Moody's rating puts it one notch above junk status. Standard & Poor's rates Spain two notches higher at BBB-plus with a negative outlook.

Egan-Jones also cut Spain's sovereign rating to "CCC+" from "B," pushing the country's debt deep into speculative territory.  The rating cut, Egan-Jones's fifth for Spain this year, carries a "negative" outlook.

Fitch Ratings cut Spain's rating by three notches on June 7 to BBB, one notch above Moody's, and put a negative outlook on the credit

The current bearish market metronome to Europe’s impotence and incompetence, Spain’s insolvency and other countries soon to follow, is neither surprising, or, heretofore, improbable. Yet, angst-filled investors remain invested.

Still, a summertime rally will climb this particular wall-of-worry, albeit in a saw tooth pattern, if only because so few people believe that it can or should. Only a fortnight ago, we stared into the abyss having received freshly humbling economic reports on real estate and non-farm payroll. This doom and gloom was sandwiched in-between periods of misplaced optimism about the outcome of Europe’s banking crisis and future global growth.

Treasury rates made their final approach and landed into the history books, June 1,  reaching 1.45% on the 10-year and 2.51% on the 30-year, exceeding all-time lows reached in the fourth quarter of 2008.

Gold and silver has finally awaken from their $1,500 range-bound sleep with explosive upside moves, also June 1, coinciding with revisions of two previous months’ worth of punk GDP growth and a terrible realization that a new Fed punchbowl is nearby while the Presidential hopeful, former Massachusetts governor Mitt Romney chances for capturing the White house in November are brighter than ever.

Only in these perverted times will bad news make the stock market happy. Although in testimony before congress, Fed Chairman Ben Bernanke downplayed any urgency in enacting Quantitative Easing III (QE III), and was instructed by a member of congress to take the punchbowl away; you can be sure that it will remain. Since, without QE III, many politicians and many portfolio managers alike fear for their careers; and the economy, too.

The remaining June milestones to watch include the Greece’s Parliamentary (Snap) election to elect parties that the (EMU) will approve of and vice versa; keeping the dream of higher asset prices and no bank loses alive. It’s being reported that $1 billion dollars daily is being withdrawn from Greek banks prior to Sunday, June 17^th election.

France’s Legislative Second Round election will to determine if the Socialists will take control of their government. Both countries’ elections occur on the same day.

On June 19th, the Federal Open Market Committee (FOMC) two-day meeting begins. Opinion is split as to whether or not an announcement regarding QE III will be made. The usual monthly data sets throughout the rest of June should experience an elevated sensitivity because the current atmosphere of presidential politics supercharges all things economic.

So, why will there be a summer stock market rally? Be patience, we’re getting there.

Over the past two years, knowledgeable talking heads informed us that Greek and Portugal fiscal catastrophes are manageable, however, if the banking crisis infects Spain, then, its economy is just too large to save and the ballgame for developed nations and emerging markets is over. Well, that time has come. Spain officially asked for a €100 billion bailout.

I’m sure you have heard that the rescue structure is the Ireland model. The double quote below, the first from Gluskin Sheff of David Rosenberg, and the second from the blog site Zerohedge commenting on Rosenberg’s comment succinctly summarizes the folly of rescue:

Rosenberg - When you realize that of the potential $100 billion to spend, 22% of that has to be provided by Italy and their lending to Spain is at 3% but Italy has to borrow at 6%. They have to lend to Spain $22bn at 3% - it is just madness. Everybody is getting worried again. The solution that they seem to have come up with seems to be worse than the problem in the first place.

Zerohedge - As we have pointed out vociferously over the past few days, even though the assistance is being earmarked for the banks, the Spanish government assumes the responsibility and so this once 'low national debt' sovereign is following in Ireland's footsteps as its debt/GDP takes a 10pt jump to 89% (based on the government's data) and much higher in reality (when guarantees and contingencies are accounted for).

If the too big to contain (TBTC) outstanding bad debt equation about the EMU was true two years ago, it’s no lees true, today.

Taken all together, this is a continuation of the crisis and fallout from 2008. Greece is in a depression. Europe will soon enter a depression. Eventually, the entire world will sink into an economic depression; another economic depression in a long line of collapses throughout history. But, somehow, we will survive. We always do. There will be new winners and new losers in the 21st century.

Back to this summers’ rally. The S&P 500 Index 52 week range is 1,074.77 - 1,422.38. The close on June 13^th was 1,314.88. Its 6-month high was 1419.04 and low was 1205.535, a ten handle move on the index before Labor Day is not unreasonable. The stock market is as much a psychological and emotional occurrence as any endeavor imaginable.

On a technical basis, the market is near the middle of its 180-day trading range. The market is nearer to an oversold condition than an overbought one. The market can ignore reality (bad news) for weeks, sometimes months, at a time. This summer’s rally may take out the year’s highs but will be the last opportunity for money managers to enhance long returns in 2012.

When the stars and stripes are waived this summer in London at the Games of the XXX Olympiad, beginning July, 27^th, lasting thru August 12^th, and gold, silver, and bronze medals for individual effort and achievement are collected by young men and women on behalf of our republic, we will lay down our various political blood sports, for a brief moment, and swell with national pride.

Is a summer rally guaranteed because the nations of the world are watching their fellow countrymen represent and excel in their sport of passion, as a payoff for years of dedication through their blood, sweat, and tears, while also inspiring the next generation to compete and succeed? No.

But, show me anything that makes sense in a de-levering world of microscopic interest rates, austerity programs that allegedly spurs economic growth, notional derivative contract values several times over of total global wealth today, an insolvent global banking system that extends and pretends the day of reckoning, or a financial world that believes somehow, someway, helicopter Ben will save the day.

We all need to believe in something.

Should the Feds Create Inflation? This Time It Is Different

Through the bombs bursting in the Korean Peninsula’s air, minutes of the FOMC meeting were released Wednesday. The division over Quantitative Easing II (QE II) wasn't as intense as the 58 year old NoKo/SoKo conflict. However, I have reservations with this logic in 2010 of affirmative voting Fed members’ confidence behind QE II theory of inflating asset prices will put a halt to deflation. 

That QE II will create a wealth effect and stimulate consumer spending, the easy stuff like the dubious weekly Jobless Claims dropped to 407,000 from a previous week upward revision to 441,000, from 439,000 is showing a positive trend. 

Also, The Reuter's/University of Michigan's Consumer sentiment index rose for November to 71.6 and third quarter GDP growth was revised up to a 2.5% annual growth from an estimate of 2.4%. The hard stuff, physical things like durable goods and housing (found below) tell a different story. Durables orders in October fell 3.3 percent, a figure below the median market forecast decline of 0.1%.  

Unfortunately, the Fed’s beautifully elegant thesis isn’t growing inside a sealed petri dish with exact ingredients from the 1930’s or 1970’s. Therefore, past performances do not guarantee future results.  

For those of us old enough to remember the 1970’s it was a far different world. During that period, current dollars had greater purchasing power than holding them until tomorrow, so it was logical for consumers to spend money immediately. However, the basic financial infrastructure for consumers was the opposite of what it is today. 

Take credit cards; this was a relatively new consumer product. Interest rates were fixed, unlike today. Shoppers would hand their credit card to a merchant and the merchant would pick up the phone and call an authorization center for approval. Then, the card would be placed in a manual charge card machine to make an impression on carbon paper for the shopper to sign after approval was granted. 

Holding and servicing fixed debt during “normal” inflationary times is easier to do if incomes are rising, mirroring the change in inflation. Virtually every credit card issued today has a variable rate. Wages have been stagnant in the US for ten years and Ireland just announced an austerity plan which includes cutting minimum wage which could become a harbinger of things to come in America. 

If we experience prolong inflation, the interest rate on consumer debt will be adjusted upward to cover issuers rising costs, accordingly. This will cancel any presumed benefits for creating inflation. 

Mortgages were different then, too. Adjustable rate mortgages did not exist. When you purchased a 30-year fixed mortgage, you could plan for your next 360 mortgage payments. This became problematic during the real estate bubble of 2003-2007. Teaser rates tied to Prime, LIBOR, the 11^th district, T-bills, COSI, etc, that allowed borrowers to qualify disappeared after 12, 24, or 36 months. Real mortgage payments undermined the false real estate prosperity of the day.

In the 1970’s mortgages were also assumable in many instances. The fixed mortgage came with your home. Think what our current housing market would look like if residential real estate came with mortgages. Would housing markets have experienced 30%, 40%, 50% in value or more, with assumable loans attached? Is a house easier or harder to sell with an assumable mortgage? 

Maybe this is an opportunity for the Department of Treasury to self-refinance mortgages directly with borrowers. New Home Sales reported the average price fell 8.0 percent to $248,200 while sales of new homes which fell 8.1 percent to a much lower-than-expected annual unit rate of 283,000. The median price of a new home plunged 13.9 percent in October to $194,900, a seven year low. 

Existing home sales were even worse. Sales fell 2.2 percent in October to a 4.43 million annual unit rate. The year over year change is a staggering 25.9%. Supply on the market has returned to 10.5 months. The median price fell an additional six tenths to $170,500. The average price moved two tenths higher to $218,700. 

Consumers were protected in other ways. In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act exempting federally chartered savings banks, installment plan sellers and chartered loan companies from state usury limits. This effectively overrode all state and local usury laws. Heretofore, banks were limited by law as to what interest rate they could charge customers. 

Then, there was collective wage bargaining. The apex of organized labor existed in this time frame. For employees, price inflation was met with multi-year wage contracts, negotiated wage increases, and Cost Of Living Adjustments (COLA). Employers could better plan their labor costs and workers would not fall too far behind, too quickly. In retrospect, these automatic triggers helped exacerbated moderate inflation as it fulfilled structural price increases. 

Manufacturing as well as capital was neither nimble nor mobile in the pre-digital age. Employers were more inclined to sit down with workers and arrive at a schedule of wages and benefits both sides could live with. Relative labor peace in the US resulted from this tack verses a more confrontational civil disobedient approach on the European continent. 

The America I just described no longer exists. Instead of a fairly closed economic system capturing Ben Bernanke’s domestic asset price inflation action, the global economy will absorb our inflation, spilling into overheating emerging economies. This will cause resentment toward our predatory monetary policy. 

At home, stubbornly high unemployment continues as more hiring of temporary and contract workers identify firms that are practicing company before country, and a deteriorating financial system that is biting disproportionately into financially vulnerable consumers’ thinning disposable income. 

Municipalities are moving closer to default, just like Europe, under the weight of this radical redistribution upward of capital since the repeal of Glass-Steagall Act. The probability of a double-dip recession followed by uncapped interest rates and a widening chasm between Tiffany & Co. and Target customers, and rising corporate profits grows. 

The Ben Bernank offers other lesser reasons why QE II is necessary, such as a goal of optimal employment, without any major tax or infrastructure jobs initiatives coordinated with other quarters of government. I think their reasoning and aiming needs more work. 

10 Reasons to Buy Gold at $1,300.00 an Ounce

1. Technical Breakout

From a technical analysis perspective, there has never been a better time to own or purchase gold. Every tradable asset has what is known as support and resistance. Support is the value by which any asset is assumed safe for buying. This is determined by previous price levels.

When prices reach this level more buyers than sellers step into the market. In the latest leg of the gold bull market, $1,000 has been established as the new floor.

Resistance is the price by which assets cannot move beyond because of an overhang of existing supply in the market. After gold reached $850 an oz. in 1980, those unfortunate buyers at that price level waited 30 years, watching the price of gold fall below $300 an oz. before $850 eventually was taken out.

The price of gold traded briefly in 2008 and 2009 in a range between $725 and $1,025 before rising short-term and long-term trend lines confirmed that the path of least resistance of the price of gold was upward.

2. Undervalued on an Inflation-adjusted Basis

If you calculate the cost of gold from it 1980 high of $850 an oz., on an inflation-adjusted basis, the price of gold today would be $2,250 an oz. At today’s price around $1,318 an oz., gold can increase $900 before it would equal its 1980 high. From there, its price can expand from increase demand.

All assets trade in cycles. Before the end of a cycle an asset becomes overvalued. Likewise, at the beginning of a cycle, an asset has been neglected by its market and is undervalued. Gold, having cleared overhead resistance, is now free to seek its 21st century value; including overshooting that fair value before the cycle ends.

3. A Store of Value

The major stock averages 10-year average annual return is virtually zero. Over the last three years, residential real estate has lost 25% to 50% of its value, depending on the market you’re referencing, yet gold has been up nine of the last ten years. This should continue.

The market meltdown of 2008 nearly destroyed the credit market. Real estate is the most credit dependent asset there is. The Mortgage-Backed Securities market, which provided the liquidity for the mortgage industry has not been repaired. Therefore, a structural cap has been placed on the future value of real estate.

U.S. stocks rose in value in the 1980s and 1990s because of deregulation, loose credit, and undervaluation. The inflationary 1970s made stocks poor investments relative to hard assets. By the beginning of the 1982 secular bull market in stocks, the average market multiple for stocks, the number of times over earnings stocks are bought for was between five and ten. Currently, the P/E (price x earnings) ratio for the S & P 500 Index is 17.08.

4. A Rising Asset in a Rising Asset Class

The soft and hard commodity complexes are on a roll. There are various recessionary and depression levels for many assets here in the U.S. towards home ownership, unemployment, commercial real estate vacancy rates, etc. But demand in Asia (the 21st century center of the universe) and South America is strong and getting stronger, monthly.

Foxconn in China, Apple (AAPL) Computer’s primary supplier recently gave its employees a 66% wage increase following 10 work-related suicides. Average U.S. wages have been flat for 10 years. Russia’s heat wave this summer severely reduced its wheat crop. Palladium, silver, coffee, cotton, wheat, pork bellies, and lean hogs are all up significantly for the year. The emerging market countries were not as leveraged as the west; therefore, their economies rebounded faster from the global recession. Their demands for commodities are driving up prices.

5. Upcoming Currency Devaluation

Last week, the Financial Times reported that Brazilian finance minister Guido Mantega said central banks are locked in an “international currency war”. The U.S. Treasury Secretary Tim Geithner is currently pressuring the Chinese to adjust the Yuan against the dollar. Japan is manipulating the Yen to increase exports. Other exporting countries are deliberately attempting to drive their currency lower to expand their respective domestic exports. Unfortunately, this race to the bottom cannot be won by all.

Europeans fled the Euro this spring after Greece debt problems appeared to be growing. Now, the Euro is surging because Ben Bernanke has all but signaled the availability of QE II or QE Lite after the November elections. The U.S. dollar became the least bad currency in the world and a safe haven. That is changing.

The U.S. economic recovery, which is now forecasted to struggle until 2015, will compel currency debasement by the Feds and compel countries and investors to reexamine their dollar holdings. This will add significant downward pressure on the dollar and upward pressure on the price of Gold.

6. Gold as an Upcoming World Reserve Currency Component

This story ran in Reuters at the end of September:

Dollar to remain world's reserve currency—Lockhart

(Reuters) - The U.S. dollar will remain the world's reserve currency, though some diversification over time is inevitable, Atlanta Federal Reserve Bank President Dennis Lockhart said on Tuesday.

"It's very far-fetched ... that the dollar will lose much of its position in the near term as a reserve currency," he said in response to an audience question after a speech at the University of the South.

"I do, however, expect a gradual reduction in the dollar's role as the rest of the world diversifies and some new currencies become qualified to be held as a reserve currency," he said.

It’s rumored that discussions are underway by various countries to prepare for when the U.S. dollar is no longer the world's reserve currency. China, Brazil, Russia, and France are in talks, with the aid of the International Monetary Fund (IMF), when the world loses faith in the dollar.

Central banks from around the world have stopped selling their gold. This is a reversal from your normal practice for much of this decade which implies that the value of gold is on the ascent.

Since no single currency has the ability to replace the dollar, a basket of currencies and gold will be created. Until such time, the informal reserve currency has defaulted to gold.

7. A Shift in Supply/Demand

The World Gold Council reported on second-quarter demand rising 36% compared with the second quarter of 2009, to 1,050 metric tons. Investment demand rose 118%, to 534.4 tons, and of that segment, ETF demand represented 291.3 tons, which was a 414% rise over 2009's second quarter.

Worldwide demand for gold is rising. From gold bar dispensing ATM machines at the Frankfort, Germany airport and the Abu Dhabi Emirates Palace Hotel, to Exchange Traded Funds (ETFs) such as GLD, IAU, PHYS, and SGOL. The U.S. Mint 2009 Ultra High Relief Double Eagle Gold Coin has sold out. However, Thursday evening, the U.S. Mint opened the 2010 American Gold Eagle Proof Coins, Rust was discovered forming on the Bank of Russia’s 2009 "St. George the Conqueror" .999 fine coins.

Domestically, baby boomers will live longer and will need more principal in order to sustain their lifestyle. This will necessitate the need to diversify away from paper assets and into hard assets such as silver and gold as inflation returns.

8. A Momentum Play

The return on gold this year is forcing money managers to throw in the towel and adjust their allocation for the yellow metal. Managers will have the remaining 90 days of 2010 to salvage their portfolio’s return for the year.

The year-to-date return for the S&P 500 Index is 3.8%, the DJIA is 4.9%, the NASDAQ 100 is 8.2%, and the Russell 2000 is 9.6%; while gold is up 22.7%, silver is up 37%, and palladium is up 43.8%. True alpha, and the path of least resistance is precious metals.

9. Betting With the House

For the price of gold to collapse from current levels, congress would need to enact legislation to correct the problems of wasteful spending, high unemployment, an expanding federal debt liability, and sensible tax increases.

The November elections of 2010 are completely irrelevant. Whether it is the Republicans or the Democrats who control Washington DC, the government's inability to correct the problems that persist in today's economy will continue. The price of gold will move higher whether it's gridlock or austerity by the GOP or of fiscal stimulus by the Democrats.

Thomas G. Dolnan’s Barron’s editorial dated October 2 observes:

Even a step in the right direction would face huge opposition. A permanent 10% cut in retirement benefits of all kinds, and the same cut applied to health-care spending, including doctors' and hospital fees, would be worth maybe $150 billion a year. A 10% cut in military spending was worth about $60 billion last year. It could occur automatically if the wars wind down. A 10% cut for everything else the government does except pay interest would be worth about $120 billion.

These would be real cuts from last year's spending, not a reduction from the rate of growth, with allowances for inflation and population growth. But they would take us only a quarter of the way to a balanced budget.

The expiration of the Bush income-tax cuts and restoration of the estate tax would raise about $400 billion a year. The tax hike and the 10% cut together would leave another $700 billion a year to be cut or taxed. Fortunately, that happens to be the advertised cost of the anti-recession programs.

Such spending cuts and tax increases are a reasonable program for national renewal—and for political suicide. So don't ask why candidates aren't proposing spending cuts to balance the budget. Borrowing is so much easier—until no one will lend.

10. The US stock and bond markets are predicting no growth in the future.

The yields on bonds and corporate earnings through cost-cutting informs sober investors that between now and 2015, the U.S. economy will struggle and will be unkind to equities.

Stock rallies are no longer a proxy for economic growth. Stocks can just as easily rise because of a drop in the dollar allows foreign buyers to purchase U.S. stocks at a discount.

Corporate culture, the ego to the stock market’s id, no longer cares about long-term goals and results, when the future is always 90 days away. Therefore, long-term, as we now know it is a contemporaneous creature that is shallow but dangerous. This environment debases paper assets and benefit hard assets.