RF's Financial News

RF's Financial News

Sunday, August 8, 2010

This week in Barrons - 8-8-10

This Week in Barons – 8-8-10:

A Clash of the Titans: A Mash-Up of ‘The Expendibles’ v ‘Eat, Pray, Love’
Mark my words à the Economy is souring – and over the next 3 months you will see a clash between the FED and JOB – and we are being buttered up for another $2.5 Trillion worth of stimulus.

Will it work – I don’t think so – because this was no ‘run of the mill’ recession. This was a complete collapse of the banking system. This was a balance sheet recession, not a business cycle recession. And to handle that – we’re doing exactly what they did in Japan – and we’re going to get exactly what they got in Japan. But let’s take a step back – from 2008 into 09 – we had a recession. There was $2.5 Trillion spent that we know of – and about another $1.5 Trillion that we don’t know about – and what did that bring us?
- Unemployment is at 16.5% (U6)
- Foreclosures and Bankruptcies hitting monthly highs.
- Retail sales and housing that stinks.
- Initial jobless claims hovering around half a million every week.
- And now the question – since we’ve spent $3+ Trillion and have obtained NO private sector growth – will another $5 Trillion do the trick?

Japan tried it – for 15 years now Japan has tried ‘quantitative easing’ – and by most people’s accounts are close to declaring bankruptcy. Everyone keeps talking about the "double dip", and YES we're going to have a double dip, and YES they’re going to throw the kitchen sink at it trying to stave it off. Factually:
- (a) the ECRI index has a 100% track record in forecasting recessions – when the index falls below -10. Well – right now we’ve fallen to -10.7.
- (b) Oil – Every time that oil has made a 100% Year over Year increase in price – a recession has hit shortly after. In November of 2009 we got the 100% double – and history tells us that within 12 months of that date – a recession should start.

The issue here is that we’ve NEVER come into a recession with unemployment at 16.5%. If the FED tosses another $2.5 Trillion at stimulus at us – and if Banks stop paying interest on bank reserves (basically forcing Banks to lend to people) will that be enough to stave off a recession. There is no doubt that activity will increase. If they get the stimulus spending into the pipeline soon enough, and they force banks to lend – it could break the mold. Because never before has one government done so many things, with so much money, in so many "unconventional" ways. Ben Bernanke is waging a battle behind the scenes at the Fed for control of monetary policy, in order to prevent a deflationary spiral. Ambrose Evans-Pritchard says: "Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4T to uncharted levels of $5T."

Factually: every indicator says a recession is certain. The fact is we should have it and get it over with – one that wipes out the weak, repairs the imbalances – in order that we can emerge leaner and meaner. But that’s NOT what is going to happen. Just Friday, the Obama Administration started hinting that they might let the hundreds of thousands of mortgages at Fannie and Freddie just "blow off" the balances they owe above what the homes are worth. Can you imagine that? In trying to save the November Elections, they want to stick YOUR kids and grandkids with the bills from a million homeowners that "got in too deep".

The issue here is that the indicators are saying that we are facing recession in mere months – but, we've never had a response as unconventional as we are getting in our history. Never before has Trillions of dollars in mortgage debt been "erased". Never before have we spent $2.5 Trillion and gearing up for $2.5 Trillion more. Never before have auto companies, insurance companies and financial companies been deemed too big to fail and put on life support. Can Ben Bernanke's unconventional maneuvers stave off a recession that the indicators prove is coming – maybe! A more interesting question could be, if they do succeed in kicking the recession down the road a little further, will real organic growth finally show up after all that and we live on happily ever after – NO! Not until the FED rebuilds the middle class taxpayer and that won’t happen any time soon.

Bottom line – a recession is coming and the FED is gearing up for the greatest salvo of economic stimulus the world has ever seen. All those "Trillions" are being printed out of thin air, and are instantly "debt". It's mathematically impossible for us to pay our debts now, so adding Trillions more is completely unreasonable? I realize that gold and silver haven’t been soaring – but as you look down the road at the dollar devaluations and potential defaults – would you rather hold a piece of paper that says Federal Reserve on it - or a nice shiny ten dollar gold piece?

The Market.
Well this week the “Plunge Protection Teams" were working overtime. On Friday (for example) we received a horrific jobs report, and we were immediately sold off for over 140 points and then suddenly rescued for the close – are you honestly telling me that millions of investors the world over decided at the same time that US stocks were the only thing they should be buying? Now – please be careful going forward as much as October is "crash month" – September is historically the worst month of the year for stocks. More "lows" are put in during September than any other month. However, this market is going to be something to behold in the next 4 weeks. Earnings are over, and the market is very extended – on NO volume. Regular folks have fled from mutual funds for months on end now, with redemptions of billions hitting each and every month. I'm thinking we are about due for a good pullback. Don't be surprised if we peel off 600 points over the next few weeks. Sure they might try and pop us out of the gate early this week – but I'll be awfully surprised if we end the week higher than we start it.

Good luck and be safe out there. You are soon about to witness the Clash of the Titans – The Expendibles vs Eat, Pray, Love – the Clash of an absolute recession with the largest attempt at stimulus ever recorded.

We’re in metals and in and out of a couple small positions in ‘short’ ETF’s: We’re back in (and out) of TZA, DXD and SDOW (all 3 inverse market ETF’s (that is to say these ‘Exchange Traded Funds’ increase in value when the market goes down)

As you see above – the metals we like for a while – unless something dramatic occurs. And if we fade thru August – the inverse ETF’s are a smart play – and potentially look for the ‘stimulus’ in September for the ‘insanity run’. Please be careful out there.

If you’d like to view my actual stock trades - feel free to sign up as a twitter follower – “taylorpamm” is my nickname on Twitter – fyi.

If you’re into movie mash-ups à here’s one that my oldest son did à It’s nearly 100,000 views – so good for him!

If you’d like to see me in action – teaching people about investing – please feel free to view the TED talk that I gave a month or so ago now:

Remember the Blog http://rfcfinancialnews.blogspot.com/
Until next week – be safe.

R.F. Culbertson

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