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February 6, 2011
Issue 134  -  A Mixed Bag
 
There is a lot of stuff happening and it's not exactly consistent.  Some things look good, some things look bad, so what is actually happening?  I believe that the economy is improving, but only due to the Federal Reserve and their Quantitative Easing.  So what exactly is Quantitative Easing?
 
Quantitative Easing is a monetary policy that is used by central banks when ordinary methods of economic stimulus are either not working or not possible.  Usually this is when interest rates are near zero, which is where the Fed is now.  Lowering interest rates is used to stimulate demand for loans which gets more money into the system.  When low interest rates aren't having the desired effect, or are at zero, the Fed will credit it's own account with money.  (money created out of thin air)
 
 
Then, using this magic money, they will buy various instruments from the member banks such as mortgages to introduce new money and credit into the system.  This is done through a process known as permanent open market operations (POMO).   These purchases give the banks excess reserves from which they can lend (or not).  Up until now, this process has not produced much lending but a lot of speculation as the banks have used these excess funds to buy assets.
 
The biggest risk with QE is inflation.  I believe that is what is happening in certain assets, especially the stock market and commodities.  In theory, the Fed will take the excess money back (by selling the assets back) as the economy heats up and that will prevent the inflation.  I don't believe that will be successful.  In fact, QE1 and QE2 haven't been successful at anything EXCEPT stock and commodity inflation.  The economy is showing some signs of improving, but not nearly enough to be sustainable without the huge stimulus.  It also looks like the QE is not anywhere near over:
 

Fed's Hoenig says QE3 "may get discussed" -MNSI

WASHINGTON, Feb 1 (Reuters) - The Federal Reserve could debate extending its bond-buying program beyond June if U.S. economic data proves weaker than expected, Kansas City Fed President Thomas Hoenig said.

Another round of bond buying "may get discussed" if the numbers look "disappointing," Hoenig told Market News International in an interview published on Tuesday.

Hoenig, an inflation hawk who vocally opposed the Fed's commitment to purchase an additional $600 billion in government bonds, reiterated his call for the central bank to reverse course, according to Market News.

He called for the U.S. central bank to "normalize" policy by shrinking its balance sheet and raising interest rates.

Hoenig has argued the Fed should raise rates to 1 percent and potentially higher depending on the economy's performance.

The Fed has kept interest rates near zero percent since December 2008.

 
These guys don't just mention these things off the top of their heads.  This is a trial balloon that is used to prepare the public for implementation.  It's coming.  To give you an idea of how much the QE has allowed things to get out of hand, you can listen to an interview by Chris Martenson with a computerized trading expert.  What does he say:
 

Transcript for Joe Saluzzi on High-Frequency Trading: The Equity Market Is Now Controlled By The Machines

 
Doesn't that give you a warm and fuzzy.  You can listen to whole interview here.
 
The POMO has been a primary source of the funds used to run these trading machines, which in turn, control the market.  As long as the POMO continues, the stock market will have an upward bias.  This doesn't mean it can't fall, in fact, the machines are MORE likely to make the market crash then people.  This is exactly what happened earlier last year when the market crashed hundreds of points in minutes.  These machines don't care what's happening, they just execute as programmed.
 
The government has become so entrenched in the markets and our lives that the two are becoming inseparable.  Look at this chart from contraryinvestor.com:
 
 
This shows the amount of money that the government is supplying to the economy is growing bigger and bigger.  The share of household income.  The percentage is now almost 19%!  Almost 1 in 5 dollars being spent by consumers is a direct payment from the government.  Where did that money come from?  Other people or debt.  Those are the only two sources.  Eventually this chart will reach a limit and I believe we are getting close.  This government meddling is leading to more and more problems.  One that is almost "accepted" is college tuition.  I recently received an email from our high school.  Here is part of it:
 
Dear Parent,

The new year is a great time to look ahead. Your family is expected to contribute to the cost of college to the extent that they're able. With the Expected Family Contribution (EFC) calculator you can estimate how much that will be. If your child has taken the PSAT/NMSQT this year, get a jump on college planning with My College QuickStart™. In the near future, work with your child to set up a balanced class schedule for next year, one that's challenging and good preparation for college.

At this point, college may seem a long way off. But it will be here sooner than you think. When the time comes, financial aid — whether grants, scholarships, loans or work-study — can help your child pay for college. However, you will be expected to help cover tuition and other expenses. How much? That depends on your individual financial situation. Use the EFC Calculator to estimate your share.

You may hear stories that paying for college tuition is almost as expensive as buying a house, but don't worry. The truth is that college is affordable — nearly half of all 2009-10 full-time undergraduates attend four-year colleges that charge less than $9,000 for tuition and fees. And they received an average of around $11,500 in financial aid, including grants and loans, to help them pay for it.
 
I have highlighted three lines in red, let's look closer.  The first line says that, "Your family is expected to contribute to the cost of college..."  Let's change this line slightly to read, "Your family is expected to contribute to the cost of your new vehicle."  Is there any difference?  No.  It's an indoctrination of thinking the government should be involved in college payments.  Do people really think they WON'T have to pay for college?  This has led to a higher tuition.  This doesn't help anybody but the colleges as they collect larger and larger fees. 
 
The second line is along the same lines that you will be expected to "help" cover tuition.  Help???  Why don't we have to pay the whole thing?  Isn't it your kid?  Why should anybody help you pay for college?  Why not help pay for your vacations?  Home additions?  Lastly, $11,500 is the average financial aid received by families.  The bottom line is that tuitions are $11,500 higher than they would be if the government wasn't involved.  These programs are redistributions programs, plain and simple.  The government should get out of college issues.  THAT would help everyone.
 
Some might argue that education is VERY important to the country's future and therefore, the government should be involved in promoting college.  This is completely WRONG.  There is no mandate or authority in the constitution for the government to be involved in education.  Or promoting ANYTHING, good or bad.  The government isn't in the business of picking winners and losers, just ensuring that people maintain their rights.
 
This constant spending of money (which we don't have) is leading to deeper and deeper holes which must be dug out of.  Check out this chart:
 
 
As you look at this chart, which shows the change in government debt, look at the transition from Bush 43, who was spending like a fool, and Obama.  The borrowing has EXPLODED.  What has been the result?  Other then the stock market increasing, not much.  If this continues, we are in dire shape.  How dire?  Here is a quote from Larry Lindsey, former Fed governor:
 

Now suppose quantitative easing is “successful” in the way the Fed intends, taking inflation close to the average 2.4 percent rate of the last two decades and government borrowing costs back to their two-decade average of 5.7 percent. To get an idea of what happens to the budget, assume this transition happens over three years, so that by 2013 interest rates are back to “normal.” This “return to normal” will mean the government’s interest costs will rise to $847 billion by 2015 and $1.15 trillion by 2019.

 
So just how bad is this?  In 2010, we paid about $413 billion in interest payments.  If the increases projected occurred, ANY gain from economic growth would be swamped by the increase in debt payments.  As the quote says, were interest rates rise to the average of 5.7%, it would double our interest payments.  What would happen if the interest rate goes higher?  Trouble.   With unemployment getting worse (ignore government headline numbers as they keep dropping more and more people out of the job pool, which lowers the denominator for the unemployment calculation) there is just no easy way out of this.  Look at this chart (again from contrary)
 
 
 
As you can see, the employment index from an unbiased (monster.com) source has turned down after a pretty good ramp up.  If this can't turn up again, there truly is no growing out of the trouble.  Make sure your financial house is in order before the storm hits.  That means eliminating unsecured debt and buying gold and silver.
 
 
Positions
 
Goro  (closed at $22.95, up $1.55, average price paid, $6.10) 
 
Mexus Gold  (closed $.23, unchanged, average price paid, $.20) 
 
There was also a new video from November and the cable pulling operation.  Check it out as you can see how the process will work.  If they can pull 10 miles a day and make $5-8 a foot, this will be a cash cow.  Here's the video (thanks to Jim)
 
 
Stocks    (Current status, Long, 100%).
 
I'll close this week with a video that made me laugh. (not sure why)  It's titled, The Dramatic Chipmunk.  Have a great week!  (yeah, I know it's not a chipmunk)