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Crafty_Dog
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« on: October 17, 2006, 12:33:13 PM »

The Curse of Voinovich

Even if Republicans hold the Senate, the Bush tax cuts could be in trouble. If the GOP loses two to five seats, its majorities on key committees are almost certain to shrink. The biggest problem is the Senate Finance Committee -- the tax writing committee of the upper chamber. Right now, Republicans enjoy an 11 to 9 majority on the committee. That will shrink probably to 11 to 10 or 10 to 9 if Republicans lose Senate seats in November.

Here's the problem: Bill Frist is retiring and this leaves an opening on this coveted committee and next in line in terms of seniority is Ohio Republican George Voinovich. But Mr. Voinovich may be the least reliable Republican on tax votes and if he's not the worst, he's definitely in the Bottom Three. Mr. Voinovich opposed death tax repeal this year, one of only three GOP defections. He has even said that he might support a higher estate tax. Mr. Voinovich has also been wishy-washy on investment tax cuts, arguing that deficit reduction should take top priority. Says one GOP Senate staffer: "We Republicans could lose effective control of the committee with Voinovich added."

The GOP already has a problem child on the committee in Olympia Snowe of Maine. She votes often with the Democrats and has little sympathy for the supply-side agenda. In 2003, she was one of three Republicans to vote against the Bush tax cuts in the Senate.

Adding Sen. Voinovich could mean Republicans would have little chance to make the Bush tax cuts permanent -- one of the GOP's key 2007-08 agenda items. One saving grace might be that any new committee appointments will likely be decided by the new Senate Majority Leader, who almost certainly will be Mitch McConnell. Sen. McConnell could brush aside the seniority courtesy and choose a reliable supply-sider and avoid all these problems. That might be his first big test as the new chief cat herder of the Senate -- assuming it remains under GOP control.

Opinion Journal (WSJ) Political Diary
« Last Edit: December 26, 2009, 02:23:59 PM by Crafty_Dog » Logged
rickn
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« Reply #1 on: October 22, 2006, 04:08:03 AM »

Woof crafty,

Permanent tax cuts are DOA because even if the Republicans do not lose control of either house of Congress, they still will not have 60 votes in the Senate for cloture.  There will be a lot of capital gains realization in 2007 and 2008 as many investors opt to pay the 15% tax rate ahead of possible rate hikes if the Dems control Congress and the White House.  Coupled with the projected decrease in corporate profits in the second half of next year, the likely increase in selling pressure on all asset classes, stocks, real estate and commodities, increases the risk of negative economic and investment data.  Also, it will create another spike in Treasury revenues that will give the 2009 Congress the incentive to spend even more.

rickn
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Crafty_Dog
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« Reply #2 on: October 22, 2006, 05:58:47 AM »

Delighted to have you with us Rick!

Your assessment seems quite sound to me. 

With the apparent victories of the Dems looming, why is the market so sanguine?
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G M
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« Reply #3 on: October 22, 2006, 06:35:32 AM »

The triumph of the dems isn't near as close as they think it is. We'll see very soon, but the buzz we're hearing is more wishful thinking rather than solid analysis IMHO. I'm going to predict that the republicans will lose seats, but will retain majority in both the house and senate.

Now i'm crossing my fingers! shocked
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rickn
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« Reply #4 on: October 25, 2006, 04:37:29 PM »

craftydog -

The markets are sanguine because they view the worst case situation as gridlock.  That is not very much different than now for taxes.

I like your new improved forum.
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Crafty_Dog
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« Reply #5 on: October 31, 2006, 12:28:32 PM »

Please note that this subject is now on the other sub-forum.
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G M
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« Reply #6 on: November 08, 2006, 10:40:06 AM »

Well, so much for my predictive ability...... cry
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Crafty_Dog
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« Reply #7 on: July 10, 2009, 01:14:11 PM »

Goldman Sachs Loses Grip on Its Doomsday Machine
Commentary by Jonathan Weil

July 9 (Bloomberg) -- Never let it be said that the Justice Department can’t move quickly when it gets a hot tip about an alleged crime at a Wall Street bank. It does help, though, if the party doing the complaining is the bank itself, and not merely an aggrieved customer.

Another plus is if the bank tells the feds the security of the U.S. financial markets is at stake. This brings us to the strange tale of Goldman Sachs Group Inc. and Sergey Aleynikov.

Aleynikov, 39, is the former Goldman computer programmer who was arrested on theft charges July 3 as he stepped off a flight at Liberty International Airport in Newark, New Jersey. That was two days after Goldman told the government he had stolen its secret, rapid-fire, stock- and commodities-trading software in early June during his last week as a Goldman employee. Prosecutors say Aleynikov uploaded the program code to an unidentified Web site server in Germany.

It wasn’t just Goldman that faced imminent harm if Aleynikov were to be released, Assistant U.S. Attorney Joseph Facciponti told a federal magistrate judge at his July 4 bail hearing in New York. The 34-year-old prosecutor also dropped this bombshell: “The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.”

How could somebody do this? The precise answer isn’t obvious -- we’re talking about a black-box trading system here. And Facciponti didn’t elaborate. You don’t need a Goldman Sachs doomsday machine to manipulate markets, of course. A false rumor expertly planted using an ordinary telephone often will do just fine. In any event, the judge rejected Facciponti’s argument that Aleynikov posed a danger to the community, and ruled he could go free on $750,000 bail. He was released July 6.

Market Manipulation

All this leaves us to wonder: Did Goldman really tell the government its high-speed, high-volume, algorithmic-trading program can be used to manipulate markets in unfair ways, as Facciponti said? And shouldn’t Goldman’s bosses be worried this revelation may cause lots of people to start hypothesizing aloud about whether Goldman itself might misuse this program?

Here’s some of what we do know. Aleynikov, a citizen of the U.S. and Russia, left his $400,000-a-year salary at Goldman for a chance to triple his pay at a start-up firm in Chicago co- founded by Misha Malyshev, a former Citadel Investment Group LLC trader. Malyshev, who oversaw high-frequency trading at Citadel, said his firm, Teza Technologies LLC, first learned about the alleged theft July 5 and suspended Aleynikov without pay.

‘Preposterous’ Charges

Aleynikov’s attorney, Sabrina Shroff, told the judge at the bail hearing that Aleynikov never intended to use the downloaded material “in any proprietary way” and that the government’s charges were “preposterous.”

Goldman isn’t commenting publicly about any of this, though it seems the bank’s bosses want us to believe there’s no need to worry. On July 6, Dow Jones Newswires quoted a “person familiar with the matter” saying this: “The theft has had no impact on our clients and no impact on our business.” Note that this person was so familiar with Goldman that he or she spoke of Goldman’s clients as “our clients” and Goldman’s business as “our business.”

By comparison, last Saturday, while most Americans were enjoying the Fourth of July holiday, Facciponti was in court warning of looming threats to Goldman and the financial markets.

“The copy in Germany is still out there,” the prosecutor said, according to an audio recording of the hearing. “And we at this time do not know who else has access to it and what’s going to happen to that software.”

Secret Software

“We believe that if the defendant is at liberty, there is a substantial danger that he will obtain access to that software and send it on to whoever may need it,” Facciponti said. “And keep in mind, this is worth millions of dollars.”

By “millions,” it’s unclear if that would be enough to match Goldman Chief Executive Lloyd Blankfein’s $70.3 million compensation package for 2007. Or perhaps millions means thousands of millions, otherwise known as billions.

Facciponti said the bank told the government that “they do not believe that any steps they can take would mitigate the danger of this program being released.” He added: “Once it is out there, anybody will be able to use this, and their market share will be adversely affected.” All Aleynikov would need to get the code from the German server is maybe 10 minutes with a cell phone and an Internet connection, Facciponti said.

Judge’s Ruling

The hole in Facciponti’s argument was that the government offered no evidence that Aleynikov had tried to disseminate the software during the month prior to his arrest, after he downloaded it and had left his job at Goldman. That’s the main reason the judge, Kevin N. Fox, cited in ruling Aleynikov could be released on bail.

“We don’t deal with speculation when we come to court,” Fox said. “We deal with facts.”

Meantime, it would be nice to see someone at Goldman go on the record to explain what’s stopping the world’s most powerful investment bank from using its trading program in unfair ways, too. Oh yes, and could the bank be a bit more careful about safeguarding its trading programs from now on? Hopefully the government is asking the same questions already.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)
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Crafty_Dog
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« Reply #8 on: December 26, 2009, 02:31:01 PM »

I just posted two important articles on the P&R thread "political economics" each of which makes a strong prima facie argument that CA and the US are already bankrupt.

IF we assume that a major spike in interest rates is coming, what investments will be helped? hurt?  Anyone remember what happened during the Volcker interest spike of the late 70s-early 80s?
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G M
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« Reply #9 on: December 26, 2009, 06:43:17 PM »

Gold and silver and investments outside the US. Obama is going to kill the dollar off.
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Crafty_Dog
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« Reply #10 on: December 26, 2009, 06:52:49 PM »

Said with love, but aren't you (and I) the fellow(s) who predicted here some months ago that the DOW would hit 6,000? cheesy

That said, you may be entirely right.  OTOH, I remember the vicious collapse of gold in the late 70s when interest rates sky-rocketed-- and IMHO a REAL good case can be made that such will be the case REAL soon, with a speed and viciousness that will leave non-pros like you and me in the dust.
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G M
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« Reply #11 on: December 26, 2009, 07:00:05 PM »

Yes, I am that guy.   sad

However, I will point out that there has been a substantial amount of market manipulation to inflate things beyond their actual value, yes?

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Body-by-Guinness
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« Reply #12 on: January 21, 2010, 10:39:06 AM »

This is likely the wrong place to post this link, but it's the most appropriate I could find. It's a long piece about a gent who got in way over his head and hence started dealing with a lot of collection agencies. He's turned the experiecne into a profitable one by suing the agencies and winning. I've mixed emotions about this, having loathed the collectors I dealt with when contending with an ex's debt, though I also think this guy is something of a deadbeat. Story here:

http://www.dallasobserver.com/2010-01-21/news/better-off-deadbeat-craig-cunningham-has-a-simple-solution-for-getting-bill-collectors-off-his-back-he-sues-them/
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Rarick
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« Reply #13 on: January 22, 2010, 07:15:11 AM »

Yeah they guy is hiding behind the law for his debts.   He is also doing a service tho', some of those debt collectors can be over the top.  I had a simple debt for breaking a lease on an apartment- I gave the company my contact information so we could settle if there were issues.   The first I knew there were any issues is when 2 months later I got my first phone call, it was not pleasant, and since I thought things were settled.......

About 6 months later the dust settled and I did walk away with enough money to cover the legal expenses, after I paid the debt.  I learned a lot about the debt collection business, and the other connected legalities, and I never had any intent to default...........

There is so much about society today that is all about PREVENTION that ends up creating more problems than just dealing with things when they HAPPEN.  Gun Laws, Airport Security, Loss Prevention, Anti-Virus, Police Curbside Manner.............

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Crafty_Dog
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« Reply #14 on: July 28, 2010, 07:07:11 AM »

By BRETT ARENDS
The Dow Jones Industrial Average last week ended up pretty much where it had been a little more than a week earlier. A rousing 200-point rally on Wednesday mostly made up for the distressing 200-point selloff of the previous Friday.

The Dow plummeted nearly 800 points a few weeks ago -- and then just as dramatically rocketed back up again. The widely watched market indicator is down 7% from where it stood in April and up 59% from where it was at its 2009 nadir.

These kinds of stomach-churning swings are testing investors' nerves once again. You may already feel shattered from the events of 2008-2009. Since the Greek debt crisis in the spring, turmoil has been back in the markets.

At times like this, your broker or financial adviser may offer words of wisdom or advice. There are standard calming phrases you will hear over and over again. But how true are they? Here are 10 that need extra scrutiny.

1 "This is a good time to invest in the stock market."
Really? Ask your broker when he warned clients that it was a bad time to invest. October 2007? February 2000? A broken watch tells the right time twice a day, but that's no reason to wear one. Or as someone once said, asking a broker if this is a good time to invest in the stock market is like asking a barber if you need a haircut. "Certainly, sir -- step this way!"

2 "Stocks on average make you about 10% a year."
Stop right there. This is based on some past history -- stretching back to the 1800s -- and it's full of holes.

About three of those percentage points were only from inflation. The other 7% may not be reliable either. The data from the 19th century are suspect; the global picture from the 20th century is complex. Experts suggest 5% may be more typical. And stocks only produce average returns if you buy them at average valuations. If you buy them when they're expensive, you do a lot worse.

3 "Our economists are forecasting..."
Hold it. Ask your broker if the firm's economist predicted the most recent recession -- and if so, when.

The record for economic forecasts is not impressive. Even into 2008 many economists were still denying that a recession was on the way. The usual shtick is to predict "a slowdown, but not a recession." That way they have an escape clause, no matter what happens. Warren Buffett once said forecasters made fortune tellers look good.

4 "Investing in the stock market lets you participate in the growth of the economy."
Tell that to the Japanese. Since 1989 their economy has grown by more than a quarter, but the stock market is down more than three quarters. Or tell that to anyone who invested in Wall Street a decade ago. And such instances aren't as rare as you've been told. In 1969, the U.S. gross domestic product was about $1 trillion, and the Dow Jones Industrial Average was at about 1000. Thirteen years later, the U.S. economy had grown to $3.3 trillion. The Dow? About 1000.

5 "If you want to earn higher returns, you have to take more risk."
This must come as a surprise to Mr. Buffett, who prefers investing in boring companies and boring industries. Over the last quarter century, the FactSet Research utilities index has even outperformed the exciting, "risky" Nasdaq Composite index. The only way to earn higher returns is to buy stocks cheap in relation to their future cash flows. As for "risk," your broker probably thinks that's "volatility," which typically just means price ups and downs. But you and your Aunt Sally know that risk is really the possibility of losing principal.

6 "The market's really cheap right now. The P/E is only about 13."
The widely quoted price/earnings (PE) ratio, which compares share prices to annual after-tax earnings, can be misleading. That's because earnings are so volatile -- they're elevated in a boom, and depressed in a bust.

Ask your broker about other valuation metrics, like the dividend yield, which looks at the dividends you get for each dollar of investment; or the cyclically adjusted PE ratio, which compares share prices to earnings over the past 10 years; or "Tobin's q," which compares share prices to the actual replacement cost of company assets. No metric is perfect, but these three have good track records. Right now all three say the stock market's pretty expensive, not cheap.

7 "You can't time the market."
This hoary old chestnut keeps the clients fully invested. Certainly it's a fool's errand to try to catch the market's twists and turns. But that doesn't mean you have to suspend judgment about overall valuations.

If you invest in shares when they're cheap compared to cash flows and assets -- typically this happens when everyone else is gloomy -- you will usually do very well.

If you invest when shares are very expensive -- such as when everyone else is absurdly bullish -- you will probably do badly.

8 "We recommend a diversified portfolio of mutual funds."
If your broker means you should diversify across things like cash, bonds, stocks, alternative strategies, commodities and precious metals, then that's good advice.

But too many brokers mean mutual funds with different names and "styles" like large-cap value, small-cap growth, midcap blend, international small-cap value, and so on. These are marketing gimmicks. There is, for example, no such thing as "midcap blend." These funds are typically 100% invested all the time, and all in stocks. In this global economy even "international" offers less diversification than it did, because everything's getting tied together.

9 "This is a stock picker's market."
What? Every market seems to be defined as a "stock picker's market," yet for most people the lion's share of investment returns -- for good or ill -- has typically come from the asset classes (see No. 8, above) they've chosen rather than the individual investments. And even if this does turn out to be a stock picker's market, what makes you think your broker is the stock picker in question?

10 "Stocks outperform over the long term."
Define the long term? If you can be down for 10 or more years, exactly how much help is that? As John Maynard Keynes, the economist, once said: "In the long run we are all dead."
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DougMacG
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« Reply #15 on: July 28, 2010, 02:58:07 PM »

The 10 myths are excellent.  I have become pro-mutual funds, but buying 2 or 3 similar ones is not diversification.  A couple of thoughts on the topics:

We live in a debt society now.  Your total savings for rainy day 'is now called 'available credit'.  Tucking money away is when you buy down your debt, high interest first.  Making a bold move toward security is to max up those equity credit lines while you can.  I can't imagine tucking money away intentionally in a bank at 1% when you expect inflation to be 3% going possibly to the mid-teens. 

My grandpa said about business, don't take on partners.  The stock is a share of ownership but you share that ownership with fickle people that lean with the wind regarding their ownership and with people who buy and sell in the millisecond with realtime computer programs - not exactly teammates.  I used to chase after the individual stocks.  Now I would say invest in your own business if you can, where you have some control over it, or pick out a fund from a place like T Rowe Price (troweprice.com) where you can get any fraction of it in or out any day without a direct fee and yet can participate in the market with at least some level of professional management.  (MHO)
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Crafty_Dog
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« Reply #16 on: July 28, 2010, 03:24:05 PM »

My father always told me "Keep you nut low son."

By "nut" he meant the money that had to be paid out every month regardless of how much you had coming in e.g. mortgage/rent, insurance, etc the idea being to facilitate riding out tough times.

Similarly Glenn Beck is strongly advocating self-reliance e.g. ability to grow one's own food.
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Crafty_Dog
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« Reply #17 on: September 16, 2010, 08:17:01 AM »

Brian Wesbury is an outstanding economist (supply side school) with a superb track record, which is why i post the following although I find it to be remarkably glib:

ey
Unfunded Liabilities And Cheap Stocks
Brian S. Wesbury and Robert Stein


Despite cries of "uncertainty" that reverberate through the financial markets, U.S. equities remain grossly undervalued. Risk premiums are exceedingly high. Too high!

In total, S&P 500 companies reported after-tax annualized earnings of $716 billion in the second quarter and had a market capitalization of $9.3 trillion. In other words, for every $100 in market value, the companies in the S&P 500 were generating $7.70 in after-tax profits--an "earnings yield" of 7.7%.

Comparing that earnings yield to the 10-year Treasury yield (currently 2.8%) reveals a gap of nearly five percentage points, the largest such gap since the late 1970s. And with profits expected to continue their upward climb, this gap is highly likely to increase even more in the next few quarters.

Relative to bonds, stocks are undervalued by a considerable margin. So what's holding investors back? Why are bond flows continuing to outpace equity flows?

One reason is fear of government spending. Current deficits and future deficits related to Social Security and Medicare are one reason. Every dollar the government spends must eventually be paid for by taxpayers. If these higher future taxes confiscate enough corporate profits, then the market will reflect that fact today with lower prices. So is the market discounting these costs accurately? Let's crunch the numbers.

The Trustees report for Social Security and Medicare estimates the present value of all unfunded entitlement benefits are roughly $50 trillion. On the same present value basis, this is equal to 3.8% of future GDP. In other words, rather than taxing 19% of GDP (as the Congressional Budget Office predicts for 2012-'13), total tax revenue would need to climb to 22.8% of GDP--an increase in tax revenues of 20% from everyone and everything that the federal government already taxes. In other words, a 10% tax rate will need to rise to 12%.

Of course everyone realizes that a 20% tax hike would never generate 20% more revenue. A dynamic model would forecast slower economic growth and more unemployment if the government hiked taxes by this much. This is why some are advocating benefit cuts. But, for our purpose here (analyzing the impact of paying for unfunded liabilities) we assume tax hikes are the only method used.

A 20% increase in corporate taxes as well as taxes on capital gains and dividends, would reduce total returns to shareholders by roughly 11%. This would reduce the earnings yield (currently 7.7%) to about 6.9%--more than 4 percentage points above current 10-year Treasury yields.

Don't take this the wrong way. We are certainly not advocating a massive tax hike to fix Social Security and Medicare. Raising tax rates will hurt the economy. Moving to private accounts would be our preferred solution. But the current level of fear about the costs of fixing these entitlement problems is out of proportion to reality. Things are far from perfect, but the stock market is grossly undervalued.

Brian S. Wesbury is chief economist and Robert Stein senior economist at First Trust Advisors in Wheaton, Ill. They write a weekly column for Forbes. Wesbury is the author of It's Not As Bad As You Think: Why Capitalism Trumps Fear and the Economy Will Thrive.
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Crafty_Dog
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« Reply #18 on: October 07, 2010, 11:11:26 AM »

It is hard to overstate how clueless and deranged some of the ideas being considered are.  Note the ominous implications of the last paragraph-- is a stampede for the exits already in the pipeline?
============
By SUDEEP REDDY
The Federal Reserve spent the past three decades getting inflation low and keeping it there. But as the U.S. economy struggles and flirts with the prospect of deflation, some central bank officials are publicly broaching a controversial idea: lifting inflation above the Fed's informal target.

The rationale is that getting inflation up even temporarily would push "real" interest rates—nominal rates minus inflation—down, encouraging consumers and businesses to save less and to spend or invest more.

Both inside and outside the Fed, though, such an approach is controversial. It could undermine the anti-inflation credibility the Fed won three decades ago by raising interest rates to double-digits to beat back late-1970s price surges. "It's a big mistake," said Allan Meltzer of Carnegie Mellon University, a central bank historian. "Higher inflation is not going to solve our problem. Any gain from that experience would be temporary," adding that the economy would suffer later.

Others warn that pushing inflation higher than the target could create public confusion and risk fueling financial bubbles and market instability. They say Fed policy already is weakening the dollar and as a result prompting a gold and commodity boom. "The Fed is treading upon a mine-laden path that has never been tip-toed through in this country," said Andrew Busch, a currency strategist at BMO Capital Markets.

With the Fed's target for short-term rates already near zero, inflation too low—floating between 1% and 1.5%, below Fed officials' informal target of between 1.5% to 2%—and unemployment, at 9.6%, too high, Fed officials are expected to embark on a new round of asset purchases to lower long-term interest rates.

In the past week, two Fed officials raised the option of explicitly pursuing above-target inflation for a time to offset periods in which inflation is below target. New York Fed President William Dudley suggested that if inflation were to undershoot the central bank's target by half a percentage point next year, the Fed could offset the miss with an additional half-point increase later on.

And, in an interview, Chicago Fed Charles Evans said, "It seems to me if we could somehow get lower real interest rates so that the amount of excess savings that is taking place relative to investment needs is lowered, that would be one channel for stimulating the economy."

Officials outside the Fed have proposed using higher inflation to get real interest rates down. Earlier this year, International Monetary Fund chief economist Olivier Blanchard suggested that nations doubling their inflation target to 4% from 2% wouldn't be risky.

Such a move could provide more room to support the economy at a time when central banks have cut short-term interest rates nearly to zero but still face weak economies, a scenario Japan has faced since the 1990s and the U.S. is confronting now. Axel Weber, head of the Deutsche Bundesbank, and Philipp Hildebrand of the Swiss National Bank called the proposal "severely flawed."

In a speech in 2003 when he was a Fed governor, Fed Chairman Ben Bernanke suggested that Japan attack prolonged deflation by announcing its goal of restoring the price level to the level it would've reached under moderate inflation. That approach, he explained, would lead initially to a "reflationary phase of policy" to bring prices back up to what would've been expected before the deflation.

But in a speech this summer, Mr. Bernanke said that raising medium-term inflation goals would amount to a "drastic" measure that's inappropriate for the U.S. economy. "Raising the inflation objective would likely entail much greater costs than benefits," he said. Inflation would be more volatile, bring more uncertainty and possibly create destabilizing moves in commodity and currency markets that "would likely overwhelm any benefits arising from this strategy," Mr. Bernanke said.

Mr. Dudley and Mr. Evans, however, are making a slightly different argument: They would leave the informal inflation target unchanged, but overshoot it for a time to compensate for the current undershoot.

Some economists question whether the Fed has the power to push inflation higher in today's weak economy. "Inflation expectations are not just pulled out of thin air," said William Poole, former president of the Federal Reserve Bank of St. Louis. "The time when the Fed would have a good chance of hitting a higher inflation target is exactly the time when it would not make sense to do so."

Ethan Harris, head of North American economics at Bank of America Merrill Lynch, suspects Fed officials raising this possibility are, in part, trying to push their colleagues toward more stimulative policy and reassure the public and markets that they still have the capacity to keep the economy away from the shoals of deflation and renewed recession. "I think they're worried about the perception that the Fed is out of ammunition, which is a very dangerous perception for the markets and the economy," he said.
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G M
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« Reply #19 on: October 07, 2010, 11:46:05 AM »

When the collapse comes, it'll happen faster than most imagine possible. If I owned a home in SoCal, I'd see it for whatever I could get for it and get out now.....
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DougMacG
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« Reply #20 on: October 07, 2010, 01:02:03 PM »

Inflation on purpose?  Along with a very nice luxury of so far having our debt in our own currency, we also have the power to devalue/erase our nominal obligations, in the tens of trillions... except for that the fact that it might be a violation of the oath to uphold the constitution including 'the validity of the public debt'. 

I have searched and not found the exact wording of the oath of office that some of these people take, particularly Federal Reserve Chair and Governors.  It is a well known fact (I think) that about 1% inflation is intentional because of deflationary fears which is why I don't think 2 or 3% is so bad with so many other factors so far out of whack, like budget, trade and employment.  Still, any intentional inflation I would think is a violation of the oath of office for any public official involved.

Further I would ask, what business is it of your government to meddle in the decisions you make of whether to spend, save or invest with your after tax money in a free society?
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G M
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« Reply #21 on: October 07, 2010, 01:08:33 PM »

Doug,

Concerns about oaths of office, the constitution and free markets are soooooo pre-1/2009. Obama promised to fundamentally transform the country, this is it. Enjoy!
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DougMacG
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« Reply #22 on: October 07, 2010, 02:01:19 PM »

GM, As a foreclosure buyer and one who rents to people on unemployment and welfare, I am in the exuberance phase of Pelosi-Obama enjoyment.  I'm not sure how much more of this fun I can take.
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G M
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« Reply #23 on: October 07, 2010, 03:00:54 PM »

Doug,

As a foreclosure buyer, what happens if the real estate market never comes back? It's my opinion that indeed we are no where near the market floor, and that once the floor is found, the market will remain there for decades to come.
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Crafty_Dog
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« Reply #24 on: October 07, 2010, 07:52:39 PM »

Federal Reserve Chairman Ben Bernanke is a student of monetary history, so perhaps he remembers Sumner Slichter. In the 1950s, the Harvard economist made his reputation as the leader of an intellectual band that Time magazine dubbed the "limited inflationists"—the idea that some inflation was good for an economy, and that the Fed should encourage a gradual rise in prices.

In a hearing on Capitol Hill, his views drew a famous rebuke from Fed Chairman William McChesney Martin, but Slichter's ideas gained currency in the 1950s and 1960s and eventually laid the groundwork for the not-so-gradual inflation of the 1970s.

Slichter died in 1959, but he is staging a rebirth at none other than Martin's former home, the Federal Reserve. A galaxy of Fed officials has fanned out to argue for another round of "quantitative easing," or a further expansion of the Fed balance sheet to boost the economy. The "limited inflationists" are once again at America's monetary helm, promising happier days from rising prices while downplaying the costs and risks.

***
 .In the first QE go-around in spring 2009, financial panic was still in the air and the Fed's justification was to save us from Depression. Today, the panic is over and an economic recovery is underway. So the Fed's new justification is that growth is still too slow, unemployment is still too high and prices aren't rising fast enough.

The Fed's Open Market Committee hinted at the inflation-is-too-low argument in its statement after its September meeting, noting that "Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability."

Last week, Chicago Fed President Charles Evans went further and put a specific number on it—inflation below 2% a year is undesirable. He was joined in his case for easier money by the New York and Boston Fed Presidents, among others. The clear message is that a Fed majority has come down on the side of QE2, and markets have concluded that the central bank will return as early as November to buying hundreds of billions of dollars of assets to ensure what Mr. Evans called a need for "negative interest rates." Sumner Slichter rides again.

***
We hope this experiment in re-inflating the economy works better this time, but mark us down as skeptical. There is no such thing as free money, and a second round of QE carries enormous risks for what looks to us like far too little benefit.

The theory of QE2 is that by buying Treasurys and other assets, the Fed help drive long-term interest rates down even lower than they are already. This in turn will spur more private lending and borrowing and kick-start faster growth. But we're told the Fed's own internal models suggest that a purchase of $500 billion in Treasurys would only reduce the 10-year bond by something like 15 basis points. (The 10-year yield is now 2.38%.) This in turn would increase GDP by 0.2% a year and cut the jobless rate by 0.2%. That's not much bang for a lot of bucks.

The case for QE2 assumes that the problem with the economy is merely a lack of money. But trillions of dollars are already sitting unused on bank and corporate balance sheets. The real problem isn't lack of capital but a capital strike, as businesses refuse to take risks or hire new workers thanks to uncertainty over government policy, including higher taxes and regulatory burdens. More Fed easing in this environment risks "pushing on a string," adding money to little economic effect.

Meanwhile, the costs of QE2 would be real and significant. With Congress spending as much as ever, the Fed would appear to be financing a spendthrift government almost on a dollar-for-dollar basis. This would make it even harder, and take even longer, for the Fed to extricate itself from the market for Treasurys and mortgage securities once it decided to do so. And by firing all of its ammo now amid a recovery, what would the Fed have left if we get another financial panic?

By keeping interest rates artificially low, the Fed is also contributing to a misallocation of capital and perhaps new asset bubbles. Messrs. Bernanke and Evans say they see no signs of inflation, as measured by the lagging indicator of the consumer price index.

But investors are having no trouble bidding up the price of commodities, including oil and gold. A rising price of oil will have its own negative impact on growth, as we know from the experience of $147 oil in mid-2008. A commodity price spike might well erase any benefit from the expected decline of 15 basis points in long-term bond yields.

As the protector of the world's reserve currency, the Fed also risks more global monetary disruption. The mere anticipation of QE2 has already caused Japan to pursue its own purchases of exotic assets, while Britain may do the same, as they and other countries try to avoid sharp rises in their currencies against the dollar. The European Central Bank may well have to follow, as the entire world adopts the "limited inflation" philosophy. In such a world, it's hardly surprising that gold has climbed in price against all major fiat currencies as a remaining store of value.

***
With such a cost-benefit calculus, why is the Bernanke Fed still plowing ahead with QE2? Our worry is that the motivation is mainly political.

The Board of Governors and Open Market Committee are now dominated by President Obama's appointees and intellectual allies. They know that their great experiment in spending stimulus has failed to spur a durable expansion, and so they are turning in unquiet desperation to the only tool they have left—monetary easing—to rescue their policy. For them, the risks of slow growth and a 9% jobless rate going into 2012 are worse than the danger of asset bubbles or a new burst of inflation.

Which brings us back to Sumner Slichter and the limited inflationists. Amid the political and media interest in their ideas, Fed Chairman Martin appeared before the Senate Finance Committee. "There is no validity whatever in the idea that any inflation, once accepted, can be confined to moderate proportions," the father of the modern Fed thundered, in a warning that would be vindicated after his retirement in 1970. That's a warning as well for the QE Street Band.
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CanisLatrans
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« Reply #25 on: October 10, 2010, 02:18:05 PM »


Let's review some of these posts.  At the end of July, the WSJ article said:

"The market's really cheap right now. The P/E is only about 13...
Ask your broker about other valuation metrics...No metric is perfect, but these three have good track records. Right now all three say the stock market's pretty expensive, not cheap."

But in mid September, a supply side economist said "Despite cries of "uncertainty" that reverberate through the financial markets, U.S. equities remain grossly undervalued. Risk premiums are exceedingly high. Too high!"

So how do we determine who is right?
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« Reply #26 on: October 11, 2010, 05:17:51 PM »

He who makes the most money?  cheesy

The Ride of the Keynesian Cowboys
by John Mauldin
October 8, 2010   


 
 
To ease or not to ease? That is the question we will take up this week. And if we do get another round of quantitative easing (QE2), will it make any difference? As I asked last week, what if they threw an inflation party and no one came? We will take as our launching pad today's unemployment numbers, which serve to demonstrate just why the Fed may in fact be ready for some monetary shock and awe.

Teachers Don't Count?
As the jobs report came out a number of headlines trumpeted the "strong" private-sector job growth of 64,000 jobs, trying to soften the overall loss of 95,000 jobs. If you exclude the loss of census workers, the job losses were "only" 18,000. However, for the first time since December of last year, we lost jobs in a month. That is not the right direction.

"Moreover, when you adjust for the slide in the participation rate this cycle, the byproduct of a record number of discouraged workers withdrawing from their job search, the unemployment rate is actually closer to 12% than the 9.6% official posted rate in September, which masks the massive degree of labour market slack in the system. This is underscored by the broad U6 jobless rate measure, which spiked to a five-month high of 17.1% from 16.7% in August." (David Rosenberg)

Let's go to Table A-1 in the BLS website. You find that the total number of "civilian noninstitutional population" has risen by exactly 2 million over the last year to 238,322,000. That is the number of people over 16 available to work. But the actual civilian labor force has only risen by 541,000. Over the last 12 months we have added only about 344,000 jobs, according to the data from the Establishment survey, or just about a month's worth in the good old days.

Here's an interesting note I picked up while looking at employment data by age and education (with seven kids, these things are important to me!). There is a cohort that has seen its employment level rise. That would be men and women over 65. The total number of people over 65 who are employed has risen by 318,000 over the last year, accounting for nearly all the job growth (although one bit of data is from the establishment survey and the other is from the household survey, but that should be close enough for government work).

Think about that. Almost all the job growth has come from those who have reached "retirement age" (whatever that is) continuing to work or going back to work. The unemployment rate for young people 16-19 is 26%. The unemployment rate for black youth is an appalling 49%. (This is not an abstract piece of data. I have two adopted black sons, so this figure means something in the Mauldin household.) Next time you go into malls, Barnes and Nobles, fast food places, notice again the work force. These are the jobs that traditionally went to those starting out.

As my friend Bill Dunkelberg, chief economist of the National Federation of Independent Business, wrote yesterday:

"Officially, the recession ended in June, 2009 according to the National Bureau of Economic Research, historical arbiters of recession and recovery dates. But in July, 2009, Congress raised the minimum wage by over 10% and 580,000 teen jobs were lost in the second half of the year even as GDP posted growth of 4% (annual rate). This was more than double the losses in the first half of the year when GDP declined at a 4% rate and fewer workers were needed. This was one of many policies implemented or proposed by Congress that made no sense as a measure to blunt the impact of the recession. The minimum wage determines the minimum value an unskilled worker must add to a business to justify employment. Congress has made this hurdle higher and more teens find they cannot get over it. This is just one of many barriers to hiring that are institutionalized in our economy, for example restrictions in the stimulus legislation that required union labor on projects."

Let's hear it for unintended consequences.

The Rise of the Temporary Worker
17,000 jobs in the latest survey were from new temporary jobs. I caught this graph from uber data slicer and dicer Greg Weldon ( www.weldononline.com). Notice that part-time workers "for economic reasons" is the highest on record at 9.4 million. My take on this is that part-time workers are no longer a leading indicator but simply a manifestation of the new reality that employers don't want to take on the burden of a full-time employee who may not be needed or who comes with costly benefits under the new regulatory and health-care regimes.

 

State and local governments shed 39,000 jobs, the largest percentagewise loss since 1982. Those jobs mean something, and as state and local governments lose their stimulus money they will continue to shed jobs as they are forced to work with less revenue. Even after many places have raised taxes, revenues are down 3%. The consumption that government workers contribute to final consumer demand is just as important as that resulting from private jobs.

20% of personal income is now coming from the US government, and wages are flat. If you take into account the tax that is rising energy prices, that means many workers are falling behind the disposable-income curve.

Where Will the Jobs Come From?

Back to Dunk from the NFIB: "The percent of owners with unfilled (hard to fill) openings remained at 11% of all firms, historically a weak showing. Over the next three months, 13 percent plan to reduce employment (up 3 points), and 8 percent plan to create new jobs (unchanged), yielding a seasonally adjusted net -3 percent of owners planning to create new jobs, 4 points worse than August. The urge (based on economic factors) to create new jobs is clearly missing in the current economy and expectations for future business conditions are not supportive of job creation. Plans to create new jobs have lagged other recovery periods significantly.

 

"Overall, the job creation picture is still bleak. Weak sales and uncertainty about the future continue to hold back any commitments to growth, hiring or capital spending. Economic policies enacted or proposed continue to fail to address the most important players in the economy - the consumer. The President promised to continue to push his agenda for higher energy costs, few believe the health care bill will actually help them, and there is huge uncertainty about a VAT tax and the fate of the "Bush tax cuts". Deficits are at "trauma" level, incomprehensible to the average citizen. No relief, just promises that the consumer sector will be asked to pay more of their income to support government spending. This has left consumer and business owner sentiment in the "dumpster", unwilling to spend or hire."

The employment surveys mentioned above are basically completed by the middle of the month. But yesterday a Gallup poll suggested that unemployment may be headed back to over 10%, and that the latter half of September was weaker than the first half. From the release:

"The rate of those 'underemployed' - mostly part-time workers - increased slightly to 18.8 percent, suggesting that the number of workers employed part-time but seeking full-time work is declining as the unemployment rate increases. Gallup explains 'this may reflect a reduced company demand for new part-time employees.'

"This rate is likely to not be reflected by federal numbers to be released Friday, Gallup says, because the government numbers are based on conditions around the middle of September.

"Nevertheless, Gallup says the trend shows continuing high unemployment which does not help the economy, and could hurt retail sales during the holiday season.

"Gallup concludes by saying, 'The jobs picture could be deteriorating more rapidly than the government's job release suggests.'"

OK, the job picture is terrible. GDP is clearly slowing down. Consumer spending and retails sales are abysmal. Consumer credit creation is visibly falling, down for seven months in a row. Housing construction is not coming back any time soon. Commercial real estate is sick, with mall vacancy rates at almost 10%. Inflation (except in commodity and energy prices) is under 1%. The approximately 3% GDP growth we have seen the last four quarters was almost 2/3 inventory rebuilding, not a sustainable growth source.

It is pretty clear there will not be much more coming from the US government in the way of new stimulus. If you're a Keynesian and in charge of the Fed or Treasury (which is the case), what are you to do?

The Ride of the Keynesian Cowboys
The Fed is basically down to one bullet in its policy gun. It cannot lower rates beyond zero, although it can pull down longer-term rates if it so chooses. But lower rates so far have not been the answer to creating jobs and inflation. All less-subtle instruments of monetary policy have been tried. The final option is massive quantitative easing, the monetization of US government debt. As the saying goes, if all you have is a hammer, all the world looks like a nail. And after the last FOMC meeting, the markets have openly embraced quantitative easing. And for good reason: that is the talk coming from the leadership of the Fed.

Since my friend Greg Weldon has so thoughtfully collected some of the more salient parts of some recent Fed speeches, let's turn the next few paragraphs over to him.

"We note the following quotes, starting with the would-be-hero, maybe-headed-for-monetary-hell, Fed Chairman, Ben Boom-Boom Bernanke himself ...

... "'I do think that additional purchases, although we do not have precise numbers for how big the effects are, I do think they have the ability to ease financial conditions.'

"Next we note commentary that sparked Monday's extension lower in US Treasury Note yields, from New York Fed President William Dudley:

"'Fed action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long.'

"Indeed, the Fed will keep pumping, until it sees the proverbial whites-of-their-eyes, as it relates to inflation, and job growth.

"More from Dudley ...

... "'The outlook for US job growth and inflation is unacceptable. We have tools that can provide additional stimulus at costs that do not appear to be prohibitive.'

"Indeed, when we first used the word 'deflation' in the Money Monitor, back in the nineties, and into the first part of the last decade, people scoffed, as this was a word equated to 'monetary blasphemy'... and I might have been 'charged' as a 'heretic' for suggesting that, someday, the Fed would PURSUE INFLATION as a POLICY GOAL.

"Now, the New York Fed President openly states that subdued inflation is ...

... 'UNACCEPTABLE'!!!!

"Welcome to the new world order, where deflation is openly discussed, and inflation is, in fact, pursued by the Federal Reserve, as a policy goal."

Greg goes on to quote Chicago Fed president Charles Evans as favoring easing, and you can bet vice-chair Janet Yellen is on board.

But there are voices that question the need for QE2. From the Bill King Report:

"Hoenig Opposes Further Fed Easing, Warns About Prices

"Kansas City Federal Reserve Bank President Thomas Hoenig said the central bank shouldn't expand its balance sheet by purchasing more Treasury securities in an effort to spur economic growth... The Kansas City Fed official repeated his view that the Fed should raise its short-term target rate to 1 percent, then pause to assess the economy's recovery. He also rejected the idea of raising the Fed's informal inflation target above 2 percent because of concern over the possibility of falling prices.

"'I have to tell you it horrifies me,' Hoenig said, responding to an audience question. "It assumes you can fine-tune things like interest rates." 'I have never agreed to' an informal inflation target, he said. 'Two percent inflation over a generation is a big impact.'" http://www.moneynews.com/StreetTalk/HoenigOpposesFurtherFed/2010/10/07/id/372979
 
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Crafty_Dog
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« Reply #27 on: October 11, 2010, 05:18:51 PM »

And then we have a speech from Dallas Fed president Richard Fisher that he gave yesterday at the Minneapolis Economics Club. I highly recommend you take a few minutes to read it in its entirety. It is well-written and thoughtful. We need more men like him on the Fed. ( http://www.dallasfed.org/news/speeches/fisher/2010/fs101007.cfm)

Let me give you a few paragraphs (all emphasis mine!):

"... In my darkest moments I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places. Far too many of the large corporations I survey that are committing to fixed investment report that the most effective way to deploy cheap money raised in the current bond markets or in the form of loans from banks, beyond buying in stock or expanding dividends, is to invest it abroad where taxes are lower and governments are more eager to please. This would not be of concern if foreign direct investment in the U.S. were offsetting this impulse. This year, however, net direct investment in the U.S. has been running at a pace that would exceed minus $200 billion, meaning outflows of foreign direct investment are exceeding inflows by a healthy margin. We will have to watch the data as it unfolds to see if this is momentary fillip or evidence of a broader trend. But I wonder: If others cotton to the view that the Fed is eager to "open the spigots," might this not add to the uncertainty already created by the fiscal incontinence of Congress and the regulatory and rule-making 'excesses' about which businesses now complain?

"... In performing a cost/benefit analysis of a possible QE2, we will need to bear in mind that one cost that has already been incurred in the process of running an easy money policy has been to drive down the returns earned by savers, especially those who do not have the means or sophistication or the demographic profile to place their money at risk further out in the yield curve or who are wary of the inherent risk of stocks. A great many baby boomers or older cohorts who played by the rules, saved their money and have migrated over time, as prudent investment counselors advise, to short- to intermediate-dated, fixed-income instruments, are earning extremely low nominal and real returns on their savings. Further reductions in rates earned on savings will hardly endear the Fed to this portion of the population. Moreover, driving down bond yields might force increased pension contributions from corporations and state and local governments, decreasing the deployment of monies toward job maintenance in the public sector.

"My reaction to reading that article [what Fisher called that eye-popping headline in yesterday's Wall Street Journal: "Central Banks Open Spigot"] was that it raises the specter of competitive quantitative easing. Such a race would be something of a one-off from competitive devaluation of currencies, a beggar-thy-neighbor phenomenon that always ends in tears. It implies that central banks should carry the load for stymied fiscal authorities - or worse, give in to them - rather than stick within their traditional monetary mandates and let legislative authorities deal with the fiscal mess they have created. It infers that lurking out in the future is a slippery slope of quantitative easing reaching beyond just buying government bonds (and in our case, mortgage-backed securities). It is one thing to stabilize the commercial paper market in a systematic way. Going beyond investment-grade paper, however, opens the door to pressure on a central bank to back financial instruments benefiting specific economic sectors. This inevitably leads to irritation or lobbying for similar treatment from economic sectors not blessed by similar monetary largess.

"In his recent book titled Fault Lines, Raghuram Rajan reminds us that, 'More always seems better to the impatient politician [policymaker]. But any instrument of government policy has its limitations, and what works in small doses can become a nightmare when scaled up, especially when scaled up quickly.... Furthermore, the private sector's objectives are not the government's objectives, and all too often, policies are set without taking this disparity into account. Serious unintended consequences can result.'"

Hear. Oh, hear!

Can Fisher and Hoenig stand athwart the Keynesian tide at the Fed and get it to stop? Or for that matter, can the growing chorus of noted economists and analysts who openly question the need or wisdom of a QE2?

I doubt it. The Keynesian Cowboys are saddling their QE horses and they intend to ride. They have no idea what the end result will be. This is all a guess based on pure theory and models (like the broken money multiplier). And I really question whether the result they hope for is worth the risk of the unintended consequences (more later). As I wrote a few weeks ago:

"If it is because they don't have enough capital, then adding liquidity to the system will not help that. If it is because they don't feel they have creditworthy customers, do we really want banks to lower their standards? Isn't that what got us into trouble last time? If it is because businesses don't want to borrow all that much because of the uncertain times, will easy money make that any better? As someone said, 'I don't need more credit, I just need more customers.'"

How much of an impact would $2 trillion in QE give us? Not much, according to former Fed governor Larry Meyer, who, according to Morgan Stanley, "... maintains a large-scale macro-econometric model of the US economy that is widely used in the private sector and in public policy-making circles. These types of models are good for running 'what if?' simulations. Meyer estimates that a $2 trillion asset purchase program would: 1) lower Treasury yields by 50bp; 2) increase GDP growth by 0.3pp in 2011 and 0.4pp in 2012; and 3) lower the unemployment rate by 0.3pp by the end of 2011 and 0.5pp by the end of 2012. However, Meyer admits that these may be 'high-end estimates'.

"Some probability of a resumption of asset purchases is already priced in, and thus a full 50bp response in Treasuries is unlikely. Moreover, a model such as Meyer's is based on normal historical relationships and therefore assumes that the typical transmission mechanisms are working. For example, a drop in Treasury yields would lower borrowing costs for consumers and businesses, helping to stimulate consumption, business investment and housing. But there is good reason to believe that the transmission mechanism is at least partially broken at present, and thus the pass-through benefit to the economy associated with a small decline in Treasury yields (relative to current levels) would likely be infinitesimal." (Morgan Stanley)

It is clear, at least from the speeches I read, that if the economy continues to sputter and looks like it may fall into recession, that the need to DO SOMETHING will overwhelm all caution. Not trying the last tool in the box if the economy is rolling over is just not something that will be considered by those of the Keynesian persuasion. Never mind that Congress is getting ready to raise taxes (and has already done so in the case of Obamacare, to the tune of almost 1% of GDP!); in the face of a slowing economy, the Fed is going to step in and try to do something.

Let me be clear. We do NOT have a monetary problem. And whatever solutions we need are not monetary. This is on Congress and the Administration. The Fed needs to step aside.

Let Us Count the Unintended Consequences
Is there a chance that it could work? The short answer is, "Yes, but I doubt it." The whole purpose of QE2 is to try and get consumers and businesses spending. For a Keynesian, it is all about stimulating final consumer demand. That is tough in a world coming out of a credit crisis, where consumers are wanting to deleverage.

But what if they push a few trillion into the economy and it shows up in the stock market? Or the market just feels good that "Daddy" is doing something and runs up on its own? Can that change consumer sentiment? Will we feel like spending more? Could that be the catalyst? Maybe, but I doubt it. But you can bet your last trillion they are going to try.

It is doubtful that any QE2 that is enough to really do something in the way of reflating assets will be good for the dollar. Now, cynics might say that is the point, as a falling dollar is supposed to help our exports (and for my international readers, I get it that this is at the expense of other countries). Do we really want to open the first salvo in a race to the currency bottom? If the Fed does it, it gets legitimized everywhere.

(By the way, as I noted a few weeks ago, my call for parity for the euro and the pound is temporarily on hold. Stay tuned. We will get back to it.)

But QE2 also drives up commodity costs. Rising oil prices have the same effect on spending as a tax increase. As do rising food costs, etc.

How does one control inflation by printing money on the order of 10% or more of GDP? Is 3% ok? Do you really want to get to 4% and then have to start taking off the stimulus to get inflation under control, and push us back into recession?

You don't get inflation without a rise in interest rates. What about the increased costs of financing an ever-rising government debt? And aren't higher rates what the Fed is fighting? Talk about confusing the market.

Does the Fed really want us to get our animal spirits back up and go back in and borrow more money? Isn't too much leverage what got us into this problem to begin with? Does the Fed really want to persuade us to go out and buy mispriced assets? Should we buy stocks now in hopes that QE2 somehow finds a transmission mechanism and keeps us from recession? If it doesn't work, then all those buyers will get their heads handed to them, making matters even worse.

What if, as I think likely, the QE money simply makes a round trip back to the Fed balance sheet? Do we go for QE3? At the Barefoot Economic Summit I just attended (see more below), one very well-connected economist said he would start getting interested about QE when it approached $6 trillion. That is the number he thinks would be needed to actually have an effect. It raised a few eyebrows when he told that to David Faber on CNBC.

If the money makes a round trip back to the Fed, the markets will get spooked. All kinds of markets.

The only way I think they do not pursue QE is if the economic data in the next few months suggests the economy is beginning to heal itself. That will make the next few months worth of data more critical than usual. The stock market seems convinced that QE2 will be good for the economy and the markets, and thus bad news will be perversely considered good.

Sadly, if we go down that path I think this is going to end in tears. There are just too many unintended consequences that can reach up and bite us in our collective derrieres. I am not sanguine about 2011. I dearly, truly hope I am wrong. For your sake, gentle reader, and for my seven kids.

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« Reply #28 on: October 11, 2010, 06:01:49 PM »

Eventually even the best juggler starts dropping things.
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Crafty_Dog
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« Reply #29 on: October 11, 2010, 06:06:13 PM »

Indeed -- and it is a "fatal conceit" to think otherwise wink
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Crafty_Dog
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« Reply #30 on: October 26, 2010, 11:50:06 AM »

Economist Scott Grannis, of whom I have spoken quite favorably on many occasions, persuaded me of the merits of TIPs a couple of years ago.  I am quite glad to report that I put a not insignificant % of my savings into them  grin

Here is POTH's take on them today-- of course, it is POTH so take the economic theory with a kilo of salt.

===============

http://www.nytimes.com/2010/10/26/business/26bond.html?_r=1&th&emc=th
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Crafty_Dog
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« Reply #31 on: November 10, 2010, 08:37:37 AM »

From MarketWatch:

The U.S. has been after China to loosen the peg on Yuan against the Dollar.  So far, China has committed only to a gradual devaluation of the currency into wider free-exchange bands.  That may take too long, and this move to print money to buy up assets may force China to unload currency in that peg.  Even if China holds on to its Dollar horde, the impact may be the same.  Where this becomes a conundrum is that China would likely unload Treasury securities along the way and it would likely buy even fewer Treasuries as a percentage of its Central Bank assets ahead.  That would imply that China could keep selling and large portions of the money freshly printed just went to buy up the debt held by China.

The FOMC wants inflation a bit closer to its 2% implied target, far higher than what has been seen.  With the FOMC keeping short-term rates low at near-zero and with the Treasury increasing its balance sheet by buying Treasuries, this forces investors into risk-based assets.  If you can magically get inflation to 2% and short-term and intermediate-term Treasury rates are so low, what does that do to real returns on an inflation-adjusted basis?  Yep, negative real rates of return...
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Crafty_Dog
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« Reply #32 on: November 22, 2010, 09:24:49 AM »

I think LEDs (new kind of hi tech light) are going to be a VERY strong sector and have what are for me some very large postions.  The sector had a huge run up  grin and recently gave a goodly portion of it back.  cry    My belief in this hypothesis is such that I added more.  Biggest position is CREE.  Others are AIXG, RBCN, and PWER.  Some of these are not pure LED plays. 

IMHO (and I have been wrong plenty) it is still a very good time to get in on these.  RBCN has been the subject of intense shorting and the shorts may be about to get stuffed worse than by a TSA groping  cheesy  DO YOUR OWN DILIGENCE, ONLY YOU ARE RESPONSIBLE FOR YOU.

The very savvy David Gordon writes:

"Oh, sure, I get that the bears conceded a great Q3 but wait, they say, for a terrible Q4. Except, Q4 is half-complete, and my tracking indicia show yet another phenomenal quarter. (Caveat: for a company of Rubicon’s size, teeny, one order postponement could put a serious damper on a quarter’s revenues.) So what we have is a stock in an intermediate term correction, which you and I hope and prefer to be an intermediate term base.

"While to my eye RBCN’s chart did not presage an upside “sling-shot” I would have preferred it had not reversed and declined as it has. I know one thing: granted sufficient time, RBCN will be much higher than today’s close and much higher than its all time high.

btw, a bottom is not the low trade but a process that unfolds over time.

Reply
■  says:
November 16, 2010 at 1:33 pm
What do these short traders know or are they soon to be creamed?

Stocks With Huge Short Interests (RBCN, BPI, GAP, CONN)

"Rubicon Technology, Inc. (NASDAQ: RBCN) has approximately 60% of its float sold short, as of November 9.
Rubicon is a semiconductor company, trading at just over 10 times next years earnings, so it’s not expensive at all. The company has traded in a wide range in the past year, from $13.68 to $35.90, so shares are fairly volatile.

Read more: http://www.benzinga.com/trading-ideas/long-ideas/10/11/611497/stocks-with-huge-short-interests-rbcn-bpi-gap-conn#ixzz15U20vkfE

Reply
■ dmg says:
November 17, 2010 at 4:40 am
File the question, Patrick, under “What’s wrong with this picture?” 

"The shorts remain convinced that RBCN cannot, will not, sustain its revenues and earnings. Oops, but the company has to date. So the shorts argue now that its margins are unsustainable, and emphasize that everyone will see this truth in the next earnings (Q4) report. Except my channel checks show that this argument (declining margins to occur NOW) also incorrect. The initial glimmers of intermediate term bases for the group begin to proliferate — first AIXG and VECO, now CREE — grants succor to the investor. Only RBCN continues to suck swamp water. But for how much longer…?

"Imagine or pretend you are not already long the shares. Piece together the puzzle and ask yourself, “Does the decline, and possible i/t base, offer itself as opportunity to invest?” I know my answer. And I believe the market offers its clues. I gain confidence by the action of the group AND RBCN’s patterns in its larger periodicities (weekly and monthly bars).

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« Reply #33 on: November 24, 2010, 05:31:21 PM »

Although he sees things far more positively than most of us here, IMHO Scott Grannis is an outstanding economist and it is always a good idea to stay in touch with his blog.

http://scottgrannis.blogspot.com/
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« Reply #34 on: November 26, 2010, 08:58:33 PM »

The most recent Doug Casey has this pithy summary of problems not being dealt with:

"Among those issues are historic levels of debt, the long-lasting consequences of a deflating housing bubble, trillions of dollars of toxic paper on the balance sheets of banks and governments here and abroad, unsupportable trade deficits, unpayable entitlements, artificially low interest rates and the likelihood of a self-feeding interest rate death spiral, the high costs of implementing universal health care and the other large programs passed in the last two years, a negative demographic trend, persistent unemployment, and, of course, the escalating race to the bottom for the fiat currencies that is increasingly seen as the only way out for desperate governments around the globe."

Other than that, we are fine.
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« Reply #35 on: December 01, 2010, 02:28:25 PM »

Disclosure:  I have what is for me a fairly substantial position in RBCN (see my post of 11/22 fopr additional details):

Kaufman Bros initiates coverage of Rubicon/RBCN with a target of $30.

Firm believes:
1) Industry overcapacity concerns are unwarranted.
2) Nearly 60% of the float in shares are short the stock, which represents nearly 15 days to cover and could be subject to a (short) squeeze.

According to Kaufman Bros, the large short interest appears to be almost exclusively hinged on potential oversupply in LED chips, particularly for LED TVs. Firm believes this concern is largely overblown as it is already being reflected in early retail reports post-Black Friday. Even more importantly, the shorts likely miss the advent of the general lighting cycle ramp in LEDs.

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« Reply #36 on: December 23, 2010, 02:14:45 AM »

I'm wondering if 2011 is going to be another Mid-Cap boom year.
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« Reply #37 on: December 23, 2010, 11:05:12 AM »

Well, I haven't a clue  cheesy  That said, there seems to be a lot of bullishness, perhaps too much, out there.  David Gordon, whom I respect and follow, thinks a sharp reversal may be in the wind.  At least my LED play AIXG is up sharply today  cool

@all:

I have been posting Wesbury's stuff on the Political Economics thread, but I think I will begin posting it here on this thread as it really about the US economy, period.

================

Personal income increased 0.3% in November while personal consumption increased 0.4% To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 12/23/2010


Personal income increased 0.3% in November versus a consensus expected gain of 0.2%. Personal consumption increased 0.4% versus a consensus expected gain of 0.5%. In the past six months, personal income is up at a 2.7% annual rate while spending is up at a 4.4% rate.

Disposable personal income (income after taxes) was up 0.4% in November and is up at a 2.1% annual rate in the past six months. The rise in November was largely due to interest income.
 
The overall PCE deflator (consumer inflation) increased 0.1% in November and is up 1.0% versus a year ago. The “core” PCE deflator, which excludes food and energy, was also up 0.1% in November and is up 0.8% since last year.
 
After adjusting for inflation, “real” consumption was up 0.3% in November (0.5% including upward revisions to prior months), is up at a 3.3% annual rate in the past six months, and at a 4.3% annual rate in the past three months.  
 
Implications: Consumers are buying again and doing it with vigor. “Real” (inflation-adjusted) consumer spending increased 0.3% in November and is up at a 3.3% annual rate in the past six months. This is not an unsustainable or temporary buying binge. Real wages and salaries in the private sector are up at a 2.8% annual rate in the past six months; real profits for small businesses are up at a 4.7% rate. In addition, those touting a “new normal” where the real economy grows 2% or less per year are making a fundamental mistake about deleveraging. Consumer deleveraging may impede spending when the debt reduction begins; deleveraging may also impede spending when the debt reductions accelerate. But deleveraging does not hurt spending when the debt reductions slow down. If a consumer is still paying down debt but is doing so more slowly than last year, her spending increases faster than her income, not slower. On the inflation front, consumption prices are up only 1% versus a year ago but seem to be modestly accelerating, with prices up at a 1.3% annual rate in the past three months. The opposite is true if we exclude food and energy. “Core” prices are up 0.8% versus a year ago but up at only a 0.3% annual rate in the past three months. Low core inflation is the excuse the Federal Reserve is using for quantitative easing. In other news this morning, new claims for unemployment insurance declined 3,000 last week to 420,000. Continuing claims for regular state benefits fell 103,000 to 4.06 million. These figures suggest robust growth in private sector payrolls in December.
===================
New orders for durable goods declined 1.3% in November To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 12/23/2010


New orders for durable goods declined 1.3% in November, coming in below the consensus expected dip of 0.5%. Excluding transportation, orders increased 2.4%, beating the consensus expected gain of 1.8%. Orders are up 9.4% versus a year ago, 10.6% excluding transportation.

The overall decline in orders in November was entirely due to transportation equipment, specifically civilian aircraft/parts (which are extremely volatile from month to month). All other major categories of orders were up.
 
The government calculates business investment for GDP purposes by using shipments of non-defense capital goods excluding aircraft.  That measure rose 1.0% in November (1.2% including upward revisions to prior months) and is up 10.4% versus a year ago. If these shipments are unchanged in December, they will be up at a 2.3% annual rate in Q4 versus the Q3 average.
 
Unfilled orders increased 0.4% in November and are up at a 10.4% annual rate in the past three months.
 
Implications:  Ignore the headline decline in durable goods orders; the report was very good news for the US economy. All of the overall drop in orders was due to the transportation sector, particularly civilian aircraft, which is extremely volatile from month to month. Outside the transportation sector, every single major category of orders increased in November, with the largest gain in computers and electronics, rebounding from a steep decline last month. Meanwhile, shipments of “core” capital goods (which exclude civilian aircraft and defense) also bounced back in November, rising 1.0% in November after a 1.2% decline in October. These shipments are up 10.4% versus a year ago but the pace of the gains has slowed of late, rising at only a 3.1% annual rate in the past three months. However, we think these shipments are poised to reaccelerate. Unfilled orders for these goods (which can turn into future shipments) have increased seven months in a row. Cash on the balance sheets of non-financial companies is at a record high and corporate profits are near a record high. In this environment, business investment is heading up.
« Last Edit: December 23, 2010, 11:31:20 AM by Crafty_Dog » Logged
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« Reply #38 on: December 23, 2010, 01:09:27 PM »

FWIW, I'm doubling down on bearishness for 2011. I'd rather that Wesbury would be right and me be wrong though.
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« Reply #39 on: December 23, 2010, 01:16:14 PM »

I don't think people can afford to be out of the market any longer.  Need to keep compounding _something_ for retirement.  The easy stock bargains have recovered.

How does Wesbury's point of view complement Grannis?
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« Reply #40 on: December 23, 2010, 01:55:48 PM »

Grannis and Wesbury have similar perspectives (both are supply siders btw).  David Gordon, Scott Grannis and I are part of an email group and David is a high level market player with the pay-to-enter blog www.investmentpoetry.com to which I subscribe.  David, who has quite a number of remarkably prescient market calls into an excellent stock picking and timing record, thinks we are about to have a sharp downturn, and that there will be a big downturn sometime in 2011-- currently he suspects it will be around the middle of the year but reserves the right to evolve his views as time goes by.

David is a vast reader.  Here is an article he shared this morning:
============
Where Will the Next Economic Boom Come From?
Derek Thompson

 

If you want to know what industry will power the next U.S. economy, follow the money. Where are investors really looking? And where is research and experimentation really happening?

Abraxas Discala, is CEO of the Broadsmoore Group, a financial advisory and investment firm founded in 2009. He sees the future the same way many urbanists and mayors see it: It's all about alternative energy. "The Internet bubble was the last real boom. The next boom is alternative energy, getting away from our need on OPEC oil," he said. "I think it could be five or six times what the tech boom was."

China's overwhelming investment in solar energy in the last five years has been formidable, Discala said. But solar is a long term bet that isn't guaranteed to take off. "I'm more interested in coal and natural gas, where T. Boone Pickens has a phenomenal plan," he said. "The fact is, if we just turned our 18-wheelers to natural gas right now, we would reduce our dependency on oil by 50 percent."

The other space Discala sees a productivity revolution is in regenerative medicine -- where scientists create living tissue to heal illnesses or replace organs. With enough government investment at its back, technologies like stem cells and soft tissue manufacturers should have breakthroughs in the next decade that will pay off dramatically, not only in the United States, but throughout the world where foreign governments will want to buy and license our innovation.

FOLLOW THE R&D

Innovation is the key to spotting the next boom, says economist Michael Mandel. That's why he focuses on research and development investments. If you follow the R&D money, it's a clear picture. "The truth of the matter is the US in the last 10 years has put its R&D money into information technology and biosciences," he said. "That's really it. We have not really put it into energy."





Source: Mandel.



What would an infotech and bioscience economy look like? First, it could resemble a communications revolution, with telecom providers like Verizon, Internet giants like Google and Facebook, and Web services like Groupon and Mint soaking up legions of software engineers, computer support specialists, web developers and programmers. These highly skilled, highly educated, and highly paid jobs where the United States still has a competitive advantage over the rest of the world.

This would, as a National Journal reporter told me, resemble Tech Boom: Part Two, "but this time, we get it right."

THE FUTURE IS SCIENCE...

Like information technology, bioscience is a term that evokes vague visions (beakers? lab coats? titration? ... titration!). But Mandel sees it more concretely. He sees the ramp up in bioscience investment from the 1990s starting to pay off in real products with vast implications for every industry. Microcellular organism-based technology to produce energy. Bioprocessing to juice productivity on our farms.  And new machines, pills and treatments to make our health care industry more efficient.

"We need a biosciences revolution because it's a direct attack on our biggest problem, which is tremendous amount of resources sucked up by health care," he said.

"Imagine if we had a pill to deal with Alzheimer's patients. Now those bodies are freed up to do other things. And those costs are freed up. That drives growth across the entire economy."

It's a compelling vision, but it raises the question: If biosciences are the future, why aren't they the present? We've been investing in the next big pharmaceutical breakthrough (cancer? AIDS? heart disease?) for two decades with frustratingly little to show for our efforts.

"For a variety of reasons it turned out that bioscience has lots of good science but not a lot of good products," Mandel acknowledged. "If we're looking for what the future looks like, there are two separate futures. One is this record of weakness could continue in which case, in which case, that's all she wrote. The other thing that could happen is it could have turned out to be a pause," he said.

"I'm betting that we'll see this bioscience drought as a pause rather than a stop."

... NOT ENERGY

The most surprising thing about Mandel's vision is his pessimism about alternative energy. At a time when almost every mayor, urbanist and government leader talking about the need to develop clean energy sources, Mandel's says the money just isn't there to build a competitive advantage for the United States.

"We have no investment in green energy R& D," he said. "We have no dynamism there. When your local university invests 70 percent in life sciences and 2 percent in energy, why put your bet on energy?"

« Last Edit: December 23, 2010, 01:59:39 PM by Crafty_Dog » Logged
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« Reply #41 on: December 23, 2010, 03:07:32 PM »

"The fact is, if we just turned our 18-wheelers to natural gas right now, we would reduce our dependency on oil by 50 percent"

No infrastructure to gas up.  Same problem w/ electric cars.

What are the precursors to a downturn in 2011?
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« Reply #42 on: December 24, 2010, 12:28:37 PM »

"No infrastructure to gas up" [Natural gas into cars or 18 wheelers]

I love the idea of using natural gas of north American origin that burns significantly cleaner into cars and trucks in place of foreign oil.  The infrastructure is one problem, also the tanks are bulkier. The demand just isn't there right now, but natural gas is far readier to be an expanded fuel source than the other snake oil investments politicians are putting us into.  Honda made a home compressor that was taken off the market.  Utah has stations statewide.  Our state has just one - with limited hours.  If you had a compressor at home that re-fuels overnight and a certain number of stations along your drive, it would work.  Every building in our area has natural gas already connected.  It is just a matter of investing in dispensing and compressing equipment - ahead of the demand.  A battery powered car won't produce major amounts of heat or air conditioning for your drive or take a large load on the long haul.  Natural gas can. Some bus companies and fleets are switching.
http://www.altfuelprices.com/stations/CNG/Utah/
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« Reply #43 on: December 24, 2010, 12:41:17 PM »

http://gas2.org/2010/12/22/west-virginia-mcdonalds-adding-two-ev-chargers/

The first place I ever saw a redbox movie rental kiosk was at McD's. Maybe NG as well as EV chargers in the future?
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« Reply #44 on: December 24, 2010, 08:37:40 PM »

"Every building in our area has natural gas already connected.  It is just a matter of investing in dispensing and compressing equipment"

Ka-BOOM!  gas stations have underground tankage & fire suppression...  More ways for nutjobs to blow up a city block...
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« Reply #45 on: January 14, 2011, 01:49:35 PM »

Retail sales increased 0.6% in December To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 1/14/2011


Retail sales increased 0.6% in December while sales excluding autos rose 0.5%. Both fell slightly short of consensus expectations.

Including revisions to October/November, sales were still up 0.6% in December while sales ex-autos were up 0.3%. Retail sales are up 7.9% versus a year ago; sales ex-autos are up 6.7%.
 
The increase in retail sales for December was led by non-store retailers (internet and mail-order), autos, gas, and building materials. The weakest category of sales was general merchandise stores (department stores).
 
Sales excluding autos, building materials, and gas increased 0.2% in December, but were unchanged including downward revisions for October/November. These sales are up 5.6% versus last year. This calculation is important for estimating GDP.
 
Implications:  Despite rising less than the consensus expected, retail sales reached an all-time high in December, eclipsing the mark set in November 2007. Sales are up almost 8% in the past year and were up at a very rapid annual rate of 13% in the past three months. Overall, real (inflation-adjusted) consumer spending likely grew at about a 4% annual rate in the fourth quarter, the fastest pace since 2006. Although retail sales in December were somewhat softer than the consensus anticipated, it’s important to remember that these figures come on the heels of two great retail sales reports in a row. And remember, all this strength is coming before the Fed’s quantitative easing should be having an impact and before the tax deal in Washington is implemented. We expect sales to continue higher because earnings are up, consumers are paying down debt more slowly, and consumers’ financial obligations are now the smallest share of income since the mid-1990s. In other news this morning, business inventories increased only 0.2% in December. Inventories will be a significant drag on the growth rate of real GDP in Q4, but that leaves room for faster growth in 2011.
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« Reply #46 on: March 16, 2011, 12:05:12 PM »

OK folks, for those of us who believe interest rates are going to start really climbing, what investments do we avoid and what do we do to protect ourselves?  What does a hunker down strategy look like?

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« Reply #47 on: March 16, 2011, 12:14:17 PM »

I think getting out of the dollar and into gold and silver makes sense, as well as non-perishable food, guns and ammo. I think one morning, we'll wake up to a financial earthquake that's going to take down the facade we've been living under. I think that time is soon.
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« Reply #48 on: March 16, 2011, 12:27:46 PM »

Worth noting:

What did the spike of interest rates under Volcker do to gold prices in the late 70s?  It killed them.

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« Reply #49 on: March 16, 2011, 12:34:33 PM »

I'm not the oracle at Delphi, all I know is we are in an untenable trajectory. Anything that can't last forever, doesn't. Those running things now are pushing us past the point of recovery.

http://www.usdebtclock.org/

Click on that, look around, then tell me how this all gets fixed and ends well for us.
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