No stop signs
Speed limit
Nobody's gonna slow me down
Speed limit
Nobody's gonna slow me down
Hey momma
Look at me
I'm on my way to the Promised Land, wooh
I'm on the highway to hell
Highway to hell
I'm on the highway to hell
Highway to hell
Look at me
I'm on my way to the Promised Land, wooh
I'm on the highway to hell
Highway to hell
I'm on the highway to hell
Highway to hell
First - Interest Rates - The Fed has said that rates will remain oh so low for as far as the eye can see. Trust them.
Second - The Dollar - The Feds implementation of QE2 (Quantitative Easing 2) is as clear of a signal that you can get that they have every intention of debasing the dollar in as rapid a fashion as possible.
Third - Commodities - If you haven't noticed lately the price you pay for things you consume/need has been increasing a bit.
Yes, the Big Picture is Full Speed Ahead, "No stop signs, speed limit, nobody's gonna slow me down."
From an investors perspective this means you need to be "all in." The Feds message to savers is speculate or die. Go to zero cash. Sell your treasuries. Buy equities, foreign equities, commodities, gold, and currencies.
Our models have had us fully invested for the last two months, and this trend looks like it is accelerating into year end. We will stay fully invested and on this highway as long as we can. Stay nimble!
Lets step back and take a little deeper look into this historic announcement. After pumping over $2 trillion into the economy since the crash, with little to show for it, Bernanke is upping the ante with another $600 billion on top of the ongoing $300 billion in POMO (Permanent Open Market Operations) commitments. This works out to about $110 billion per month for the next eight months. How big is the creation of $900 billion in new dollars? Well, M2 Money Supply (all currency, travelers checks, demand deposits, checkable deposits, retail money market funds, savings, and small time deposits M2SL_Max_630_378.png ) is currently at about $8.709 trillion. So the Fed is going to add about 10% to the money supply over the next eight months, therefore the purchasing power of your dollar denominated assets will decline by about 10%. Put bluntly this is a 10% tax on everything you own.
Is it any surprise that gold set another record high.
We argue about the effects of extending the Bush tax cuts, which might amount to 3% of a years salary, while the Fed, with no electoral oversight, simply devalues your life savings by 10%!
For those of us in the top 5% of wage earners (W2 Income over $110,000) this is just all fine and dandy, we can buy whatever we can get our hands on that is rising faster than the dollars decline. All ships will rise, especially the yachts. This is exactly what Bernanke wants, asset inflation, and the wealth effect, but he's playing with matches in the refinery. Once this inflation genie is out of the bottle, it can be incredibly difficult to coerce back in.
I do feel a bit bad for that other 95%, those poor folks who have to pay for all of this whenever they drive to work, buy clothes, or heaven forbid, eat! It sucks for them when the price of the things they need, the things that make up 60% of their disposable income, goes up 2% in one day, doesn't it?
If you think that printing money out of thin air won't make stocks go up please read the following excerpt from
Businessweekly, October 22, 2008, it doesn't end well:
While markets across the world have been crashing, the Zimbabwe Stock Exchange has being seeing record gains as citizens turn to equities to protect their money from the country's hyperinflation.
The benchmark Industrial Index soared 257 percent on Tuesday up from a previous one day record of 241 percent on Monday with some companies seeing share prices increase by up to 3,500 percent.
But before Wall Street traders start packing their bags and heading south, they should bear in mind that these figures are just another representation of Zimbabwe's collapsing economy and are almost meaningless in real terms.
Zimbabwe, once a regional breadbasket, is staggering amid the world's worst inflation, a looming humanitarian emergency and worsening shortages of food, gasoline and most basic goods. Inflation is at 231 million percent, but some experts put it more at about 20 trillion percent.
"Why leave money in the bank?" asked Emmanuel Munyukwi, chief executive of the Zimbabwe Stock Exchange at a seminar on the doing business in Zimbabwe on Tuesday.
"People are forced to come on the stock market. They believe that after hard currency (gold), the stock market is the only viable option where you can get a bit of a return," he said.
But before Wall Street traders start packing their bags and heading south, they should bear in mind that these figures are just another representation of Zimbabwe's collapsing economy and are almost meaningless in real terms.
Zimbabwe, once a regional breadbasket, is staggering amid the world's worst inflation, a looming humanitarian emergency and worsening shortages of food, gasoline and most basic goods. Inflation is at 231 million percent, but some experts put it more at about 20 trillion percent.
"Why leave money in the bank?" asked Emmanuel Munyukwi, chief executive of the Zimbabwe Stock Exchange at a seminar on the doing business in Zimbabwe on Tuesday.
"People are forced to come on the stock market. They believe that after hard currency (gold), the stock market is the only viable option where you can get a bit of a return," he said.
Now The Election - How do you spell Shellacking?
The largest GOP margin in the House since 1946, a gain of over 60 seats. Six new Senators. Eight new state Governors. And a pick up of over 600 in the state's legislatures.
Now for the hard part. How will all those who voted for Republicans feel in 18 months, as we prepare for the next Presidential election, if unemployment is still over 9%, and GDP growth is negative (highly probable)? So many in the GOP ran on a platform of less government spending, and no new taxes. While I totally agree with a smaller, less intrusive government, the pain that we will have to endure to get from grotesquely bloated to something significantly smaller will be extreme, and will take many years not months. Do we as a nation have the intestinal fortitude to endure the years of pain? We may know fairly soon.
Last February Congress passed legislation raising the debt ceiling from $12.394 trillion to $14.294 trillion, not a single Republican voted for it. In four short months they will probably have to raise it again. Will the Republicans vote for it this time? Will the Tea Party members vote for it? Rand Paul has said that he is willing to filibuster against the debt ceiling bill. What happens if the debt ceiling is not raised? Technically we are in default. We have to go to a cash basis, that is we can only spend what we take in. We currently spend more than a trillion more than we take in. If we take in $100 million today and have people show up looking for $150 million they will have to get in line. First we would pay the bond investors since we need them. Then we'd probably send out some Social Security checks, but eventually the money runs out and people don't get paid. Congress (Democrats or Republicans) has always voted to raise the debt ceiling. John Boehner is not crazy and he will try to convince his new colleagues to raise the ceiling, but just how crazy are the Tea Partier's? Should be interesting.
Speaking of the Paul's, Ron Paul is expected to chair the Monetary Policy Subcommittee. Now, the senior Mr. Paul has long been a vocal critic of the Federal Reserve and a strong proponent of the gold standard. Now he has the power to be more than a critic. In the following video interview given November 3rd he says that he and his son Rand will propose a bill on inauguration day to abolish the Fed, or at least audit them. I'm sure Mr. Bernanke is looking forward to explaining his reason for QE2 to Mr. Paul.
Social Security makes an error on two W-2's for 2009 to the tune of $32.3 billion!
This slipped through the cracks for many since it was reported on election day, but the Social Security Administration admitted (after Bloomberg questioned the original numbers) that they made a mistake. In figures released on Oct. 15 they made it appear that the top earners in the US saw their pay quintuple in 2009 to an average of $519 million. After adjusting for the $32.3 billion error the average incomes of the top earners actually declined 7.7% to $84 million each. The amazing thing was Social Security spokesman Mark Lassiter's explanation, “We call it erroneous, you call it fictitious. It’s the same thing,” Lassiter said. “There were some invalid, I guess is the best way to put it, W- 2s.”
Here is a copy of the corrected report ( 2009 Wage Statistics corrected report ). What is amazing is that 50% of wage earners had net compensation less than or equal to the median wage of $26,261.29. $110,000 got you into the top 5% and $200,000 got you into the top 1%.
Highway To Hell
With so much noise/news its tough to stay focused, but please remember the big picture; Don't need reason, don't need rhyme, ain't nothin' I would rather do. Going down, party time, my friends are gonna be there too. I'm on a highway to hell.
Be careful out there, and keep the lights on,
Chris Wiles, CFA
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This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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