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Saturday, 31 October 2009

Dr. Ron Paul - Be Prepared for the Worst- This large-scale government intervention in the economy is going to end badly

Dr. Ron Paul - Be Prepared for the Worst- This large-scale government intervention in the economy is going to end badly - http://j.mp/4htZ7I


Any number of pundits claim that we have now passed the worst of the recession. Green shoots of recovery are supposedly popping up all around the country, and the economy is expected to resume growing soon at an annual rate of 3% to 4%. Many of these are the same people who insisted that the economy would continue growing last year, even while it was clear that we were already in the beginning stages of a recession.

A false recovery is under way. I am reminded of the outlook in 1930, when the experts were certain that the worst of the Depression was over and that recovery was just around the corner. The economy and stock market seemed to be recovering, and there was optimism that the recession, like many of those before it, would be over in a year or less. Instead, the interventionist policies of Hoover and Roosevelt caused the Depression to worsen, and the Dow Jones industrial average did not recover to 1929 levels until 1954. I fear that our stimulus and bailout programs have already done too much to prevent the economy from recovering in a natural manner and will result in yet another asset bubble.

Anytime the central bank intervenes to pump trillions of dollars into the financial system, a bubble is created that must eventually deflate. We have seen the results of Alan Greenspan's excessively low interest rates: the housing bubble, the explosion of subprime loans and the subsequent collapse of the bubble, which took down numerous financial institutions. Rather than allow the market to correct itself and clear away the worst excesses of the boom period, the Federal Reserve and the U.S. Treasury colluded to put taxpayers on the hook for trillions of dollars. Those banks and financial institutions that took on the largest risks and performed worst were rewarded with billions in taxpayer dollars, allowing them to survive and compete with their better-managed peers.

This is nothing less than the creation of another bubble. By attempting to cushion the economy from the worst shocks of the housing bubble's collapse, the Federal Reserve has ensured that the ultimate correction of its flawed economic policies will be more severe than it otherwise would have been. Even with the massive interventions, unemployment is near 10% and likely to increase, foreigners are cutting back on purchases of Treasury debt and the Federal Reserve's balance sheet remains bloated at an unprecedented $2 trillion. Can anyone realistically argue that a few small upticks in a handful of economic indicators are a sign that the recession is over?

What is more likely happening is a repeat of the Great Depression. We might have up to a year or so of an economy growing just slightly above stagnation, followed by a drop in growth worse than anything we have seen in the past two years. As the housing market fails to return to any sense of normalcy, commercial real estate begins to collapse and manufacturers produce goods that cannot be purchased by debt-strapped consumers, the economy will falter. That will go on until we come to our senses and end this wasteful government spending.

Government intervention cannot lead to economic growth. Where does the money come from for Tarp (Treasury's program to buy bad bank paper), the stimulus handouts and the cash for clunkers? It can come only from taxpayers, from sales of Treasury debt or through the printing of new money. Paying for these programs out of tax revenues is pure redistribution; it takes money out of one person's pocket and gives it to someone else without creating any new wealth. Besides, tax revenues have fallen drastically as unemployment has risen, yet government spending continues to increase. As for Treasury debt, the Chinese and other foreign investors are more and more reluctant to buy it, denominated as it is in depreciating dollars.

The only remaining option is to have the Fed create new money out of thin air. This is inflation. Higher prices lead to a devalued dollar and a lower standard of living for Americans. The Fed has already overseen a 95% loss in the dollar's purchasing power since 1913. If we do not stop this profligate spending soon, we risk hyperinflation and seeing a 95% devaluation every year.

Ron Paul is a Republican congressman from Texas.

Friday, 30 October 2009

Forget Stocks: Investors Pile Into ETFs - Sept. saw ETF industry surpass $700B funds under mgmnt—a new high

Reading - Forget Stocks: Investors Pile Into ETFs - Sept. saw ETF industry surpass $700B funds under mgmnt—a new high -http://j.mp/32ZQBn

Investors are funneling more and more money into exchange-traded funds to brace against what is expected to be a difficult market in the coming months.

Traders at the New York Stock Exchange.

Concerns about both volatility and a sideways churn after a massive seven-month rally have steered investors away from direct stock plays and into ETFs so they can be nimble while still investing in broad sector indexes.

Unlike regular mutual funds, which are priced once a day after the market close, ETFs trade throughout the day just like stocks.

September saw the ETF industry surpass $700 billion in funds under management—a new high—as investors flocked to the vehicles and away from hedge funds and other risky instruments.

"Individual investors are buying more and more open-end funds and they're buying more and more ETFs," says Keith Springer, president of Capital Financial Advisor Services in Sacramento, Calif. "You have the appearance of diversification and professional management; you don't have to pick individual stocks. They're liquid and it's much cheaper."

Jeff Cox
Staff Writer

Interestingly, it's not even the ETFs that hold individual stocks that are driving the surge.

Fixed-income funds, particularly taxable bonds, were the big gainers in the third quarter and throughout 2009. The group has seen an inflow of $26.7 billion this year, including $8.1 billion in the third-quarter alone, according to data from Morningstar.

Conversely, US stock ETFs have seen a net outflow of $30.4 billion in 2009.

"Over the last quarter the influx (in bond funds) has been there and we're still seeing unprecedented highs in the amount of money in these things," says Bill Walsh, president of Hennion & Walsh in Parsippany, N.J. "There's a little bit more dependability than the equity market. They still feel the volatility and uncertainty of equities."

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The iShares Barclays TIPS Bond [TIP 104.09 0.46 (+0.44%) ] ETF has been the big winner in the group, more than doubling its assets in 2009, Morningstar said in a recent analysis.

Other leaders this year in asset generation are the iShares iBoxx $ Investment Grade Corporate Bond [LQD 105.68 0.94 (+0.9%) ], SPDR Barclays Capital High Yield Bond [JNK 38.00 -0.19 (-0.5%) ] and theiShares iBoxx $ High Yield Corporate Bond [HYG 85.19 -0.80 (-0.93%) ].

At the same time, ETFs that play the broad indexes are still the most popular in trading volume among investors on an individual basis, despite the recent trends.

The SPDR Trust [SPY 103.56 -3.09 (-2.9%) ], which is indexed to the Standard & Poor's 500, by far remains the leader in volume, with an average of 194 million shares a day changing hands. The PowerShares QQQ [QQQQ 40.97 -1.12 (-2.66%) ], which tracks the Nasdaq tech barometer, is second.

But four of the top 10 ETFs are bear funds, meaning that investors remain heavily interested in capitalizing on downward moves in the market. TheDirexion Daily Financial Bear [FAZ 22.92 2.53 (+12.41%) ], which provides three times the negative of movements in the Russell 1000 Financial Index, sees average daily volume of nearly 74 million shares.

Though those types of bear funds have received their share of criticism, investment advisors generally like the diversity of options the ETFs provide.

A trader at the New York Stock Exchange.
Photo: Oliver Quillia for CNBC.com
A trader at the New York Stock Exchange.

"The ETF community generally has been very creative in making sure they introduce products that capture investors' attention," says Nicholas Colas, chief market strategist at ConvergEx, an institutional brokerage in New York. "The ETF world is definitely taking a page out of the mutual fund playbook. They're coming up with all kinds of varying products. With ETFs, every day is a new day."

That's important to Colas, who believes the market has reached a fair value point after hitting a middle ground between the October 2007 historic highs and the lows of March 2009.

He's not especially bearish, but believes that investors looking to capitalize on a market moving in a tight range need to spot a handful of trends that will make money.

In a recent research note, Colas broke the trends into three categories and provided possible ETFs for each move, primarily as hedging mechanisms:

  • Consumer weakness: Slow holiday spending will weigh on the economy, so he recommends the ProShares UltraShort S&P 500 [SDS 41.44 2.20 (+5.61%) ], which bets double against the S&P. He also says industrial sector ETFs could work as a hedge against the consumer.
  • Further Dollar Weakening: There are a variety of ways to play hedges on the dollar, which is likely to stay low as the economy struggles to recover. The PowerShares DB Dollar Index Bearish [UDN 28.05 -0.18 (-0.64%) ] is a direct play, while the SPDR Gold Shares [GLD 102.50 -0.188 (-0.18%) ] and Claymore/Beacon Global Timber Index [CUT 16.51 -0.41 (-2.42%) ] are both long funds that bet on goods which prosper during US currency weakness.
  • Geopolitical turmoil: Should situations in Iran or Pakistan escalate, investors will want to play oil, which can be accomplished through thePowerShares DB Oil Fund [DBO 26.96 -0.90 (-3.23%) ]. "A strong geopolitical shot will hurt financial asset values," he says. "Good diversification tells you that you should find an asset that will rise on that."

Capital Financial's Springer also has doubts about a robust recovery and is adjusting client portfolios for gains he sees in mid-cap stocks, utilities and emerging markets. Respectively, he is using the iShares S&P MidCap Growth Index [IJK 71.26 -1.98 (-2.7%) ], iShares DowJones US Utilities[IDU 68.42 -1.31 (-1.88%) ] and Direxion Daily Emerging Markets Bull 3X Shares [ Loading... () ] that pays triple on growth in the MSCI Emerging Markets Index.

Most of the index funds are passively managed. However, the market is beginning to see more active managers into ETFs, with big mutual fund names such as Vanguard, PowerShares and State Street gaining a foothold.

Indeed, the popularity of ETFs has seen some mutual funds comprised solely of ETFs. One such fund is the four-star ETF Market Opportunity Fund [ETFOX 10.1 -0.26 (-2.51%) ], which holds a mixed bag of ETFs with the PowerShares QQQ as its largest component.

"Investors want exposure to ETFs but when they look there's over 800 between the ETNs and ETFs themselves. They kind of get lost," says Paul Frank, portfolio manager of ETFOX. "What I try to do is give them a prepackaged product."

Frank doubts whether the active funds will catch on, but they appear to be gaining popularity among investors tired of hedge funds and their unpredictability.

Barclays Wealth is one such institution trying to lure wealthy hedge fund investors, pushing the simplicity and liquidity of ETFs as a healthy alternative to the dangers of the hedge world.

"There are a lot more ETFs in different asset classes than (there) had been in the past, and they're becoming more nuanced," Sean Crawford, portfolio manager of the new strategy at Barclays, told Reuters recently. "It's become a pretty compelling investment idea."

Saturday, 24 October 2009

Reading- Even the Fed Doesn't Want to Hold U.S. Dollars- A 500% increase in SDRs: the “global” currency issued by the IMF- http://j.mp/EdK94

This is the scariest image in finance:

The above chart shows the dollar’s performance since the Fed announced its Quantitative Easing program in March. This chart tells us two things:

  1. Americans just got 15% poorer on the world stage thanks to Ben Bernanke
  2. A currency crisis is in the works (and perhaps already starting)

Regarding #1: When the financial crisis hit, the Fed realized it would need to keep interest rates low while it attempted to bail out the banks (80% of the $200+ trillion in derivatives sitting on commercial banks’ balance sheets are related to interest rates).

The problem with this is that it makes Treasuries very unattractive to foreign investors (China & Japan) who want a higher yield. Consequently, the Fed decided to pick up the slack by buying $300 billion worth of Treasuries through the now famous Quantitative Easing program.

As I noted last week, the Fed is now the largest buyer of US debt (it bought more debt than the next three largest buyers combined in 2Q09). China and Japan are no one’s fools. And they’re not going to fund a monetary policy that is both profligate and likely to erode the value of their dollar holdings.

Which brings us to item #2: the coming dollar crisis.

I am not a huge fan of technical analysis, but it is a useful tool for navigating a trader-heavy, liquidity driven, manipulated market such as today’s. On that note, I want to point out that the dollar began forming a falling bullish wedge pattern starting in June (see above chart). This pattern entails an ever-tightening range of lower highs and lower lows and typically precedes major breakouts to the upside.

Except it didn’t.

As you can see, the dollar broke down out of this pattern in late September. It then rallied back up into the trading range before breaking down again. This is bad news. The next line of support (place where the dollar could bounce) is 76. We've already broken that one too.

Now the next line of support is 72. Now, the dollar has only fallen to this level once in the last 30 years (Summer 2008, see the chart below). If we fall below that, then we’re in uncharted territory and a major dollar devaluation is in the works.

Perhaps it’s already happening.

To review a point made earlier, the dollar has lost 15% of its value since March 2009. On an annualized basis, we’re talking about the dollar losing almost a third of its value in one year (30%). That is an absurd level of devaluation. And China, Japan, etc. have had enough. It is now clear that a flight from the dollar has begun; the Fed buys more US debt than the next three biggest buyers combined.

However, what most people don’t realize is that even the Fed itself is shifting away from the dollar. Everyone knows that China and Japan hold massive foreign reserves (the dollar). But the US Federal Reserve does this too (we own euros, yen, etc.). And for some reason the amount of foreign reserve assets (non-dollar assets) on the Fed’s balance sheet skyrocketed by 50% to $133 billion at the end of August.

Now, $133 billion in foreign reserves is nothing compared to China and Japan’s ~$3 trillion. But a 50% increase in one week is an astounding rate of change.

The culprit?

A 500% increase in SDRs: the “global” currency issued by the IMF. The blog ZeroHedge caught this story first and pointed out that SDRs are the IMF’s means of maintaining a “super reserve” currency for the world. SDRs are defined as: a basket of currencies, today consisting of the euro, Japanese yen, pound sterling, and U.S. dollar.

Now, one has to wonder why the US Federal Reserve decided to suddenly buy $40 billion worth of SDRs overnight. The answer is that the IMF decided to massively increase the amount of SDRs outstanding from SDR 21 billion to SDR 204 billion in late August.

This came as part of a G20 decision made in April 2009 to stabilize the global financial system. Interestingly, of the countries involved in buying SDRs, the US bought the most at SDR 30 billion, compared to Japan (SDR 11 billion), and China (SDR 6 billion).

I realize this is getting a bit technical. But in simple terms this means that the US Fed intentionally participated in a world reserve currency scheme that devalued the dollar.

Folks, even the Fed doesn't want to own dollars. It’s time to look for a currency that can't be devalued.

Sunday, 4 October 2009

Fed accnts for nearly 1/2 of all Treasury bought in 2nd Q$164B of $339B Fed bought more than the nxt 3 purchasers combined

Fed accnts for nearly 1/2 of all Treasury bought in 2nd Q$164B of $339B Fed bought more than the nxt 3 purchasers combined http://j.mp/gMM9k

The Fed’s FOMC announcement came out…

We got exactly what I expected, a kind of wishy-washy, “hedging our bets” statement from the Fed. You have to remember that Bernanke was Greenspan’s right hand man for much of the bubble days of the ‘90s and early ‘00s, so the guy is an expert at walking both sides of the line when it comes to policy and public statements.

For instance, the Fed announced it would keep interest rates between 0% and 0.25% for an “extended period.” No surprise there. As I’ve noted previously, 80%+ of the $200+ trillion in derivatives sitting on US commercial banks’ balance sheets are related to interest rates.

For the Fed to hint at raising rates (let alone raise them) would kick off a systemic implosion that would wipe out the very guys the Fed has been bailing out. Suffice to say the Fed won’t be raising interest rates now or anytime too soon (within the next 3-5 years, unless inflation destroys the dollar).

The Fed also announced it would be slowing its purchase of Mortgage-Backed Securities (what I call the Fed’s “cash for trash” program). The Fed has stated previously that it will buy $1.45 trillion in mortgage-backed securities from US banks and that this program will end by the end of 2009. However, last week the Fed said it will be extending the program (but not the amount of money spent) until the first quarter of 2010.

Again, this is not much of a surprise. The Fed performed a similar act with its Quantitative Easing Program (extending but not increasing the amount). However, given the increasing public outcry about the Fed’s balance sheet, this issue of buying toxic debt (and the mortgage backed securities the Fed is buying are nothing if not that) may become a hot topic in the near future. If there is ever a successful audit of the Fed’s balance sheet, kiss the big banks’ equity (and share prices) good-bye.

The Fed did announce that it would let its Quantitative Easing program end in October. If you’re not familiar with this program, it’s basically a fancy way of saying that the Fed has been buying US debt in order to finance Obama et al’s massive deficit.

This particular development is key. A little known fact (and one totally ignored by the mainstream media) is that the Fed accounted for nearly

The Fed’s purchases outnumber foreign holders (foreign governments), US households, and Primary Dealers (mega banks) combined. One should also note that foreign holders reduced their purchases of US debt from $159 billion in 1Q09 to $101 billion in 2Q09 (a 40% decrease).

In simple terms, these numbers indicate that if it were not for the Fed, the US Treasury market would have almost assuredly had numerous failed auctions in the second quarter. It also shows us that foreign holders (China, Japan, etc.) are reducing their purchases of US debt at an incredible rate. This tells us two things:

1) China and pals are putting their money where their mouths are: refusing to service our debt as they did in the past

2) Treasuries will have to become a lot more attractive (higher yields) for foreign investors to start buying again

I’ve often stated that the Fed will have to sacrifice stocks or the US dollar. If the Fed does in fact end Quantitative Easing in October (as it has stated it will in last week’s FOMC), then we’ll see what the market really thinks of US debt as an investment class. It’s clear from the above data that foreign holders want higher rates (yields) in order for them to start buying more heavily. However, as I’ve stated before, the Fed cannot afford higher interest rates without blowing up US banks.

Keep your eyes on the Treasury market going forward. This could very well be the next major crisis brewing. It will certainly be our first taste of how a market operates without life support courtesy of the Fed.

I’m guessing the results won’t be pretty.