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Posted On: 2006-12-14
Length: 27:56

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Hello, hello, hello, this is Johannes Ernharth, you're listening to Vigilant Investor live with my co-host Stephan, how are you doing, Stephan?

Stephan: Doing well Johannes, how about yourself?

Doing fine thanks. Interesting day in the markets today, of course the Dow Jones broke its old 6 year record again, one more time broke this year record, so it's up about 5.62 points above the previous high for this year so it's up about eight tenths of a percent, closing at 12, 416 and the S&P 500 hit a 6 year high, and that took it up to 1,425 at its close at about eight tenths of a percent itself, almost 9 tenths, up 12 points. So, big news you're going to be hearing about that all over MSNBC tonight, its already making the news around the various web sites out there that cover the finance on the major side of things. But, you know Steph, is it really a high? Is it a brand new high in both of these?

Stephan: Well, again as we always mention, if you adjust it back for inflation back to 2000 where you know, when we hit our last quote "highs" the market's trading at about 10,300ish in inflation adjusted dollars, i.e. even though the number is higher today in '2000' dollars it's about 1300 points below its high back then. So, the number's bigger, but as we always say it's kind of like going to the gym and painting the number 60 on a 45 pound plate, slapping in on each side of the bench, or 2 of them on each side of the bar and thinking that you're stronger.

Correspondingly with, well I should also mention that Nasdaq was up 21 points, closing at 2,453, it's still down a little, about six tenths of a percent from its high earlier in the year, but it's climbing right along and consequently the VIX which we always talk about there, the CBOE volatility index dropped another two and a quarter percent today and that takes it down to 9.95, so we're back under the 10 level, and getting back into the territory where nobody seems to be concerned about much of anything. And the record mind you for the year was 9.81, which takes it down into the 13 year, 14 year low territory, telling you that you know, people are even less worried about risk today than they were in the late 1990's amid the dot.com bubble. So, nothing to worry about, just keep on moving and hey, it's the what, me worry economy, isn't it Stephan?

Stephan: Well, yeah but you know it's interesting, I had mentioned a couple of things, number one, you know we've talked about this before, but as Ben Bernanke held rates tight at the Fed at least for the time being, it did not drop them, investors bet against that and i.e. ultimately Ben will have to lower rates because they see the U.N. or the U.S., the U.S. economy is weakening. So all the sudden you had a bond rally the day that the Fed decided to hold rates and not drop them. Also something I think is extremely important, and again it's all the spin, but the dollar climbed to a three week high, yet the three week high is a dollar thirty one point four six to the Euro, which ain't so hot compared, you know that is a low for the dollar. Gold has also stayed resilient at around the 630 level per ounce and as things are going so hot and sexy, you would think the Gold would start a rush downward, and silver pushing still 14 dollars, compare gold and silver to where they were a year ago, some smart money out there is saying hey these are investments, we still want to be in we don't have a lot of faith in certain things going out there and it's not the retail investor that's doing this. One thing is for sure we know that the you know, the worlds' central banks are clearly not reducing their money supply. I mean that just keeps expanding year over year. I was just reading earlier today that Chinese money supply, even in the face of all this, you know allowing their, the yuan to gain a little bit against the dollar, because you've got Henry Paulson out there doing his big mission to try to encourage them to be a little more flexible with their currency and allow the dollar to drop somewhat in order to help stave off some of the trade deficit that, you know even then it's, you know it was going at a breakneck speed, it was in the double digits in terms of money supply and that's what they have to do in order to convert all those dollars that we spend abroad. I mean they have 1.3 trillion dollars in reserves, in U.S. assets, in U.S. dollar denominated assets there, they're getting so many dollars through the trade deficit with people in America who are purchasing things made there, that when those businesses that are based in China get dollars, you know short of, there's not a whole lot they can do in their own economy with it short of operating on the black market. So what they're basically trying to do is they have to go down to their banks and they want to convert those dollars into the exchange rate against in the yuan so they can pay their people and they can buy things in their own economy. And central banks in turn cash out those dollars for the banks on the community level and the central banks, the only way that they have enough yuan to covert the dollars is that they're printing it out of thin air, and that's a lot of dollars that they have to cover so they're definitely printing at a rapid pace and so forth. So, need to keep that in mind as well.

Absolutely, absolutely. Moving onward, taking a look at the dollar, speaking of the dollar, the USDX gained a good bit, up about four tenths of a percent today and trading at 83.69, so that 83 point was one of those break points where a lot of people were saying, once it goes below that, look out, anything can happen. And yet there's some stability over the past, you know the past couple of weeks once it broke down below the 83 and you know you keep in perspective too that really broke down, the dollar really broke down heavily on a very thinly traded day in the U.S. market's where there wasn't a lot of support to be had, and that was the Friday after Thanksgiving when a lot of people just aren't in, out there trading. So, it's important to keep that in perspective as well. But the bottom line is general trend is downward, I mean we go back to November 11th, it was up at around 85, 85.5, trading around those areas, so just a month's time it's definitely got some weakness and when the dollar index is dropping, it's fairly substantial because it has to be a little more stable. So again, you know we still think the long-term trend is got to be that the dollar is going to grow weaker. But, relative to other currencies, you know the Chinese are printing more and more of their currency, the euro is getting printed day in and day out and all these banks are doing it, it's not as if our dollar has a real fair chance to devalue legitimately against other currencies and legitimately being somewhat of a you know, not necessarily an accurate word because what is legitimate when everybody is printing money out of thin air to compensate for their own economies and their own currencies and so forth. And, well it's just again, as you pointed out, what's it doing, what's happened to the dollar relative to other assets that cannot be printed out of thin air? And if you look at what's happened since 2000 you know again, the Dow may not have hit a new high today when we adjust it for inflation but it's about, has about half the purchasing power it did in 2000 when adjusted for oil, when adjusted for gold, when adjusted for you know, copper and things like that, it's not even close. So when you know you can't print money and you can't manufacture a lot of that purchasing power it will be interesting to see what happens to commodities going forward as this money supply keeps getting cranked out and as we mentioned before the M3 continuations, the broadest indicator of money supply that used to be published by the Fed, but they discontinued it saying they didn't really think it was valuable anymore. There are services out there that will still do this and it's now broken the 10 percent threshold when it's calculated, the difference between M2 and the other portions of M3 have been reconstituted and you know there's definitely not a shortage of money supply type demand out there and that's just going to cause prices to continue to rise.

Stephan: Yeah and I what I think is interesting, you know, how long will other countries allow the dollar to slide dramatically as it has? You're starting to see U.S exports start to pick up a little bit but we're still again shifting so much manufacturing, our companies are shipping so much manufacturing abroad to have done so much more cheaply and how long will Europe let the euro slide, obviously the Chinese don't let their currency slide, you know and, but along those lines, I think the currency issue is somewhat of a sidebar, the real issue is once this retail season is over, what's going to happen to the U.S. economy? And will the correlation continue that, the 12 month lag between the S&P and the housing index, where the S&P has basically mirrored the housing index to a great degree, you know trailing by one year. And I think you have a little bit of distortion always around the holidays and I think this is all great, and you can catch the spin, you know you have the New York Fed's factory index for that region, New York, picked up a little bit even though the rest of the country has been not so great from a manufacturing standpoint. But again, it's the psychology of cheerleading that takes place in our industry and it's, look we are completely objective. There are opportunities in any scenario. You just have to be open minded enough to take advantage of them, any investor does. What's really intriguing, is that you tend to see our industry or even the media sort of cheerily grab any little potential glimmers of hope out there and put a little bit of a spin on it but the bottom line is the smart money is betting that, the smart money, not central banks that are trying to manipulate things, but actual investors are betting heavily on the U.S. treasury, bidding it up, know that there ultimately there will be a rally created by declining interest rates next year as our government is going to need to stimulate, or need to lower rates. So you know, what we say to everybody out there is this, pay attention to what's going on absolutely, take everything with a grain of salt, see things for what they really are, but you know notice the spin when it's out there. And nothing has really changed in the economy, you're looking at a housing market that has not shaken out at all. Johannes just put up an interesting post on our web site regarding what's going on in the San Diego area and an excellent comment on how this is not even the tip of the iceberg relative to what's going on out there. So, the National Association of Realtors or any association of realtors of the housing industry, they're going, which way, come on everybody, which way do you think they're going to spin things?

Absolutely, and just to reference what Stephan was mentioning there, this is in the San Diego area, the median sales prices, single family houses slipped 6.7 percent, year over year from 2005 and condo prices have slipped a massive 11.4 percent year over year, dropping from 395, 395 thousand on average to 350. And over all a total of 578 single family homes in the North County area sold in November, down 21 percent from the same month a year earlier. The condo sales were down at about 22 percent. So what you're seeing is you know this is one of those areas that was really really really bubbled up, and of course it's really hitting the fan there hard and that's where you expect to start seeing additional problems on the foreclosure front. And that's another one of the news items that's making the rounds today pretty aggressively is that foreclosures are up, you're seeing late mortgages picking up, and when you have a combination of the two of those things and primarily that's been confined so far, not to these huge bubble areas, and I think a lot of people have been dismissing he bubble areas, saying, look, dismissing the bubbles impact or its relevance and saying that you know look if this is really truly a problem would we not be having a lot of these foreclosures and so forth, and mortgage delinquency issues not in the areas where you have the biggest bubble, and of course the answer is not because you know the areas with it are the first ones that are going to be hit are going to be those area where people start to getting into the game, they were going to those investment seminars and you know Stephan, we're in one of those environments here, Pittsburgh has not been the San Francisco Bay area economy, you know where everybody was doing all the dot.coms in the 90's, in the late 90's and all of the sudden you still have technology going on to Seattle or Miami market where prices have gone up, it's been relatively flat, it's still above inflation, above the historic averages, but by all means it's nothing even remotely close to that. But you know we still hear on the radio day in and day out, advertisements for people to come on out, learn how to get rich through real estate investing. And that's happening you know, countrywide, and as I mentioned yesterday, Casey Serin, we were talking about him on our last night's show that Iamfacingforclosure.com guy, here's a guy, 24 years old out in California, gets you know 2.2 million over 8 properties without having really to disclose anything, prove anything, that his income is what it is or even lives in the house is, and that money is getting shoveled out, you know, he's the tip of the iceberg out there. But you know the real areas where you run into problems are Michigan, Ohio, that's where those numbers are very high, even in Colorado, Colorado's been leading and hasn't seen tremendous home price appreciation, has not bubbled up. And that's because people were thinking that with these super low rates, it was a great opportunity to buy, they overextended themselves a lot earlier and the appreciation was not there to support the faulty premise to begin with. Now what we're going to see in my estimation in these bubbled up areas where these home prices are now beginning to plummet, are the consequences now of having all those great years for so many years, just lured everybody in like lambs to the slaughter. And what happens, and this is classic inflation induced bubble environments, it just basically dislocates all that capital, all that free cheap money gets redirected and gets plowed into housing where it really didn't need to go or it would never have gone naturally, so that the Casey Serin's of the world can buy up 8 properties over 4 states and attempt to flip them and get rich. Now, if Casey was having problems before that, his problems started back in November of last year, can you imagine what it's going to be like for the Casey Serin equivalent, even if he did it legally, he fudged on his mortgage application and so forth, you know your average flipper in San Diego is going to just get hammered here with an adjustable rate mortgage starts coming due, he's been doing interest onlys, he's you know, desperate to offload these properties and now he's looking at 11 percent drop in his condo or, you know a 7 percent drop in his house price and you know after sinking all the money into it, probably an additional amount to fix it up for a flip. It's just going to turn uglier than it is now and let's not forget that in 2005, now a lot of people were talking about statistics prior to this, but stats that I have seen 20, think it's 26 or 24 percent of mortgages in 2005 were for investment properties, okay? There were another additional 14 percent or 16 percent, I can't remember which it was, for a total of 40 percent between the two were for vacation properties. You add them both together, you've got 40 percent. Everybody defends the U.S. housing market saying, well yeah just because prices drop it doesn't mean everybody's going to have to sell, well heck in 2005 alone you're dealing with how many hundreds of billions of dollars of mortgages, 409 percent of them were second home properties, well then you've got to reevaluate what the potential problem could be. And again we're not guaranteeing you know, the end of the world here in housing and so forth but by all means don't just be gobbling up the National Association of Realtors' line when they say, oh, we're at the bottom right now. Even in the article we posted up on our web site today, the local real estate authorities in the San Diego area are saying, yes, yes, yes, but we've already hit the bottom. And that's what they always say is you're plummeting. It's always the bottom [...]

Stephan: They said that in 2000, 2001 buy and hold, buy and hold, but then the [...] Wall Street's mantra. But basically another area to keep your eye open on is what we're trying to get China to do, we're trying to get China...Paulson's over there in China, and first of all we're about to make the mistake of potentially sanctioning, throwing trade sanctions on China. If, which is as bad, which is as bad if we basically it's either we're going to throw sanctions on them, i.e. tariffs or whatever, making goods here more expensive for the American consumer, just what they need, to paycheck to paycheck middle America, or we want the Chinese to let their currency to float upward to make their goods more expensive. Just let the paycheck to paycheck middle American population needs like a fist in the eye. So, you know, the ultimate in stupidity, you've got politicians in there now, they're going to blow it Johannes, they're really going to blow this and what this is going to do, is really put the American consumer in, and the Chinese are smart enough to know it.

Be careful what you wish for, you know, already Wal Mart is coming in and revising its earning estimates downward as having its worst year in 10 years, you know the lower income, middle income American that has made Wal Mart the largest retailer in the world in the United States is already tightening up. And we're seeing that happen, I imagine if Henry Paulson and the administration and a lot of these pro trade barrier types get their way with the adjustment of the Chinese currency, well, yeah, I'm sure these people are all going to be racing out to Wal Mart to pay an additional 5 or 10 percent, when all prices from Chinese made goods go up that much if our currency drops that much relative to them. That's how it happens.

Stephan: Well, yeah and Democratic Senator, Evan Baya, I guess it's Baya from Indiana, in one of the dumbest statements I've ever heard, a new approach to our China trade policies is long overdue, and I hope Secretary Paulson returns from his trip with something to show for his efforts, i.e. make them make their goods more expensive or we will. That's what they're saying. Make them, make them their goods more expensive for our paycheck to paycheck majority of our country to buy. Either by letting their currency float up against the dollar or we're going to tax it. The crowing [...] comment that he makes is, given the administration's track record, I doubt the American people will see much progress on unfair trade. That goes down, let's call it our stupid, let's start something, the stupid comment of the day. That is the dumbest comment I've heard today.

Yep, no doubt. Well, you know, be careful what you wish for you just might get it. And especially with politicians its, you know to the average layman out there who doesn't really understand how this all works, it sounds good on the surface and you know politicians always fall into that, if it sounds good on the surface and it makes them seem like a hero, they will sell it to you left and right and you know everything from the minimum wage, to [...] place trade barriers on the competition out there and it enables them to avoid the real problem which is, you know fundamentally the U.S. environment, overtaxed, over regulated, just a pain in the butt to do business in here, it's definitely not the land of the free. It used to be, it's the land of hyper regulation, it's the land of pay your attorneys, pay your CPA's, pay your consultants and you know, the old concept of, you know go to start out and stake out your claim and whatever business you want to and as long as you do it ethically and provide value to somebody else, forget it you need to have so much capital just to jump through all these hurdles. It's great for the big businesses, it's good for the big guys who are well established. You know, consequently it's great for the Wal Marts of the world and I always say you know, if people are very up in arms about Wal Mart and the destruction it does to towns, community based businesses and so forth, and they blame Wal Mart for the problem, and really what they ought to be doing is saying, Wal Mart is the symptom of the bigger problem. Wal Mart just has the critical mass, it is the ideal size and has developed the ideal model for dealing with the stupidity that has been put up in the way of the free market in the U.S. and therefore you have to do, if you want to provide, the consumers need cheaper made goods, they're not making ends meet and they are obviously not. I mean, they're shopping at Wal Mart because it stretches their paycheck out, paycheck to paycheck.

Stephan: They're shopping at Wal Mart Johannes because they have to. They must.

And these arrogant sob's down in Congress can talk about it like is un-American and so forth, you know, when you're getting paid 200 thousand dollars to be in the Senate, maybe you don't get it. But, the reality is people have to do that because they have to do that. And it's not a matter of choice, and if they have an extra 50 dollars at the end of the month, you know who can blame them for it? Now, we start driving the prices up, we start putting them under as well, then you've got some serious problems and we can try to hamstring Wal Mart with all sorts of union proposals and minimum wages and extra health care requirements and all that kind of stuff, but all that's going to do, it's pasting over the real problem. Hey, we probably ought to be wrapping up really soon here. One other note that I wanted to hit on today that is an excellent, excellent, excellent piece and we just posted this up actually in the past couple of minutes into the, we will be posting it up on vigilantinvestor.com, which is where you can read our daily written material. The U.S. Treasury, actually the division of the U.S. Treasury, the what do they call it, not the money printers... what are they, the mint, the U.S. Mint. They basically today had announced they had passed a temporary ordinance, whatever you want to call it they have the rule in effect now where it is illegal, you want to call it capital controls if you want, but they're putting restrictions on how many pennies and how many nickels you can export out of the country, the limit is no more than 5 dollars of those coins for individuals. If you're a traveler and you're hopping on a plane, you can't have more than 5 bucks in coins, nobody's allowed to ship through the mail or postal service an so forth more than one hundred dollars of them, unless you have some sort of special license to exceed that amount. And even then, these coins can only be transferred for what they determine is legitimate purposes. And the whole reason for this Stephan, you know what it is?

Stephan: Why is that?

The copper content and the actual metal content is now worth [more] than the money it's printed on. Or the money that it's representing. So in other words, a penny is all you can get worth of goods when you go spend a penny in a store, you spend a nickel in the store, you're only getting 5 cents of worth. In reality that penny is worth more melted down, it's actually worth 1.12 cents out there on the market, if you melted it down and sold it for its copper content, or other metal content, it's worth more to do that. And the same with the nickel, which is not worth 5 cents, but actually 6.99 cents, so basically 7 cents. So, if you've got enough nickels, and you melted them down, but don't do this, because if you get caught you could go to prison for this. But you know, this is the consequence of decades and decades of inflation. When they first converted the, well they took all the silver out of our money years ago because silver was obviously worth a lot more than the coins and so forth, and made it into at the time what they viewed as worthless metals, and now we've gotten much further down the line with printing more and more money, out of thin air just manufactured out of thin air, devaluing the currency that the penny is actually has less purchasing power than its metal content.

Stephan: Well, think about it Johannes, look at the silver dollar. Okay, it's an ounce of silver, right? An ounce of silver is trading basically for 14 dollars an ounce, but you can only get a buck's worth of goods for it, okay, pure silver dollar, that's why they stopped making them. So this is the result, this is not the result of these guys printing more pennies or more nickels or silver dollars, it is the result of expanding the money supply to ridiculous levels, heating up the printing presses, the government, the banking system, etc.. this is the beginning of an Ayn Rand novel.

Well, it's comical too, and then you know the rational person in the free market would say well, hell if I can get 6.7 cents per nickel, why don't I just melt this sucker down and protect myself from the inflation that they've been - inflation is functionally stealing from the people. When you print money out of thin air, if you or I go an do it in the basement, the reason it's illegal to run a printing press is because the purchasing power you and I get by spending money that we print in the basement out of thin air comes out of everybody else's pockets who have dollars and they're storing their wealth in them. For some reason we've granted this privilege to the government and vis-a-vis the Federal Reserve and for all these high fluting purposes of you know, goodness and so forth. But, every dollar that's manufactured out of thin air, and we're talking about in the billions of dollars per year, that purchasing power comes out of the pocket is a tax on everybody out there from poor to rich and you know, and here you go, if you want to melt down your nickels they're going to throw you in jail for trying to protect yourself against their, basically a debasement of the currency. They're counterfeiting, they'll throw you in jail so they can keep that act up.

Stephan: I think a closing comment to our listeners is this, look most people are unaware, ignorant of these facts, and it is your job as a human being to be as aware as you can be. That said, are you going to get the government to change their policies, are you going to get the government to stop doing, did they get the emperor in Rome to stop clipping coins or diluting their metals, absolutely not. But, what you need to do is you need to be aware of this when you invest your money, and you need to not be stupid and understand what's really going on and think about how you're going to counter these inflationary effects.

And what we mean by that is not just, you're day to day decisions, your entrepreneurial decisions, your family decisions, you know, should you be piling up more credit at this point, all these things. Be careful out there folks is the point of Vigilant Investor, it's why we put together the daily radio show, or the streamcast show via talkshoe.com it's why we have our Podcast available, and it's why we have vigilantinvestor.com to help you connect the dots and hopefully get some better ideas of what you could be doing out there, what you need to be keeping your eyes on so you can just make good decisions. Bad decisions are made financially whether again, entrepreneurially or otherwise are always made when you don't have all the information, and you're only working with part of it. So, we'll wrap up with that Stephan. A reminder to everybody who is tuning in, our next Friday show will be our first hour long show starting at 3:20 so almost an hour earlier than our ordinary daily show. So, tune on in there and that is replacing our former Wednesday night who which will be, the last one last night. So, next Friday, and tomorrow of course tune in at 4:15 for our final 15 minute to 20 minute to half hour, I guess we're running a little bit longer today, our usual 15 minute short show. So, we'll talk to you tomorrow and in the meantime tune into vigilantinvestor.com and make sure to subscribe via iTunes and Talk Shoe. This is Johannes Ernharth and as always none of our discussions today should be construed as an offer for any investment, or as any investment advice. Take care.

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