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Financial Market Analysis

Posted On: 2007-02-02
Length: 1:04:28

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Well, hello hello. This is Johannes Ernharth and you have tuned into today's edition of Vigilant Investor live. Another Friday another long week, and here we are. Finally winter has arrived in the great United States. For a long time here we've been getting off Scott free at least on the East coast of things with temperatures in the 70's earlier this month, and now all of the sudden things are a little bit colder and of course the rest of the country is getting slammed, California, the orange fruit problems, getting freezes out there, destroying the citrus crop, all sorts of craziness. Texas is getting snow and ice and ah, just one thing after the other. What to make of it? Well, in news today, moving on. A lot of stuff is going on of course, the usual sorts of things. Treasuries have started doing a little falling, the prices have definitely gone down in oil over the past couple of weeks and I think that we mentioned it before that Goldman Sachs did a little bit of rigging, changing of the Goldman Sachs Commodity index which definitely helped bring prices down and if you're a reader of vigilantinvestor.com of course you know that kind of stuff. And I probably should before I even get into the details remind everybody that you can call on in at your leisure and be part of the discussion, part of the show. And you do that by dialing (724) 444 - 7444, and you always can get through if you dial our show number, which is 982. We're hosted by talkshoe.com and our talkcast id is 982 and if you call on in, it's helpful if you registered, you can simply enough use your own pass code is often times your phone number or something along those lines, but it's like a phone number length number. We have one if you just are listening right now an want to dial on in, if you listen to our streamcast out there and use our own personal password, which is 222-333-4444, that's 222-333-4444 and be a part of the show. I see there are some people who have logged on to the Talk Shoe IM, instant messaging system chat area. It's a nice little chat environment there are people often times who will sit there and just talk as the show goes on about the conversation that's happening and oftentimes questions can be asked that way. So, really depending on how involved you want to be with the show, you can do it different ways. Just listen to the streamcast always, of course we always record the show so you can subscribe to us via iTunes, which is a nice alternative as well. iTunes or any other software that allows you to do Podcast downloading. The thing about iTunes is it automatically syncs up with your iPod. And outside of that you can listen to us also via Talk Shoe chat where you can hear us and also at the same time do their typing and chatting, or if you want to be really involved and converse with us, be part of the conversation, just dial on in. So, all that aside moving on talking about how oil price have been kind of all over the place the past couple of weeks, we know definitely that the oil, heck 6 months ago was trading up close to 80 dollars you know at one point, and now we've hit substantial lows compared to where we had been closing or trading today at about 51.99, so 52 dollars. The lowest it's been in the past 52 weeks has been not quite, a little bit lower than that, but the highest today was trading at about 52, the low today about 50.75. So it's actually gained a little bit from its opening which was 50.75. So, the big question is will crude drop on down into the 40's and you know its' always a possibility that could happen. Also, looking at the U.S. dollar index, which is something we do week to week. We can check it out, it is dealing with 84.88 at the moment. And that's after opening up at 84.90. So it was trading as high as 85.15 today. So the USDX has been showing some strength again as well and that has a lot to do with oil basically dropping its price over the past couple of weeks. And really giving people the impression that you know perhaps inflation is finally under control and there's not a whole heck of a lot to worry about anymore. But, we're not so convinced of any of that here at Vigilant Investor. So, I see my co-host Stephan Ernharth has arrived. Stephan are you there, can you hear me?

Stephan: I am there Johannes, good afternoon.

Good afternoon to you as well. Just covering the markets a little bit. May as well continue to discuss what else, all has gone on out there today. Dow Jones is currently trading just down a little bit, 1256, 12, 562, excuse me, got the S&P 500 trading up just a touch at 1, 430.10 and the Nasdaq Composite at 2, 450, up about 7 points. Meanwhile we also like to take a look at the VIX, the VIX and that's trading at 10.30 again. So, its flirting again Stephan with the 10 level, which is again, we're talking about just an indicator for most, same people of being you know just indifference to risk. Meanwhile, Google is boy, where is that trading now, 489.96, it's almost the exact opposite of Google, I kind of view Stephan as being the indicator of overconfidence in the equity markets, in that thinking that that stock truly is worth you know, 490 dollars after trading in the range okay? F 331 to 513 over the past 52 weeks. But in any event, those are the markets and any thoughts before we move into other stuff Stephan?

Stephan: No, I think that, I think that it's not uncommon, the time period, it's like you see this type of confidence or quote "overconfidence" and time will tell, time will tell. But I think there are a few other interesting things to point out, you know the resilience of gold is continually something to watch, I think we're trading in the 330's today, or 630's I'm sorry, and gold has been really resilient in light of, you know there's a supposed tie in to gold and energy. And you know if energy goes down gold is quote "needed not as much an inflation hedge." But while energy has dropped pretty dramatically here the price per barrel of oil has dropped dramatically, gold has remained resilient and has actually started a march upward. And I think the question though is that most retail investors don't own gold, most retail advisors i.e. two individuals are not advising gold so, the question is, who is buying gold? And we tend to think there is some smart money out there that realizes what's really going on and it's a valuable commodity.

Yeah true it's a, you know gold is trading at I think 635 today and boy, I mean over the last 6 months it was trading as low as 560 back in October and that's after it reversed from being up around 720. And of course it got to 720 in short order, far too quickly for a rational level to have been attained there, so it had to back off somewhat. But, you look at gold's steady upward climb and it's still on the mark of being an upward trend, it's not as if that sucker has reversed. I don't think you can say the same for all commodities necessarily and I think that might be a sign of a slowing economy and perhaps, you know, one of the problem areas that we talk about week to week Stephan, is just the excessive amount of liquidity out there, all that money supply that's been ginned up over the, not just the last 5 years since the recession in 2001 reared its head after the dot.com bubble and the equity market bubble just entirely imploded there. Desperate measures forced a lot of liquidity in the system, but that's just a continuation of something that's been going on since the mid 90's. And you know, really the continuation of a broader trend that really got its hooks into the U.S. economy with the end of the gold standard in 1972 as Richard Nixon closed the gold window. And I mean even if you want to look back further, you could say the reason Nixon had to close the gold window and functionally default on the guarantee that the dollar can be exchanged for you know 35 dollars for an ounce of gold was done because the inflationary cycle, the trend had begun long before that and you know had really gained momentum in the 60's. So, it's very easy, you know, I guess the reason I'm going on a little bit of the historical perspective side of thing is it's very easy to look at the housing bubble that we're dealing with right now and look at some of the inflation things that have happened and the oil situation of the past 5 years and kind of look at them in the vacuum of just what's happened over the last 5 years, and say, alright, okay we're done with that and we don't have to worry about it. But I think, it's more astute to look at it in the broader historic context of just how far along we are in a broader, longer term cycle relative to a gigantic credit bubble that has been building pretty much since the end of the depression in the 1940's, end of WWII.

Stephan : Well, I think it's an important point Johannes, but I think it's also an important to point out that continued inflation since the depression is what has greased the engine. And I believe that it's a trend that will continue and actually that there is the possibility to have a severe financial fallout or collapse or whatever. But you also have to look at the potential that, the very real potential that it will continue to be used, that is inflation, as a lubricant to keep things going. And you know I think what we want to continue to talk about it surfing the inflation wave. And maybe surfing it squared. And part of that wave could very well be the stock market. It may not be the most efficient way to take advantage of the inflationary cycle, there are other sectors out there that we have chatted about, but it is still a way to take advantage of it.

Yeah, no doubt, no doubt. It's interesting to see what the read is right now. I guess a few, more than a few articles came out today to remind everybody the home prices are, the foreclosure I guess, the whole housing bubble, we're hearing everything has bottomed out, nothing to worry about. But we keep arguing, you know, heck, we're just seeing the tip of the iceberg. And for those who are not familiar with Vigilant Investor or our opinions, we've been saying for a long time that this was a housing bubble, and it was building and building and building, and it was a matter of musical chairs back when everybody was in denial. The overwhelming majority of your, you know Wall Street analysts denied that there was a bubble, your economists, your Greenspans and everybody, your Ben Bernankes were all saying, ah nothing to worry about here, it's just you know, a robust market, and you always hear the word robust out there it's a, you know, watch out a little bit. But the bottom line is in December, this is cnnmoney.com reporting that we've basically hit the 100 thousand mark again for the fifth straight month in terms of foreclosures. Now that was about, we exceeded 100 thousand for the fifth straight month I should say. It was down about 9 percent from November but still up 35 percent from December of 2005. And that's according to reality track out there. And I think that this is something that is going to continue to be putting pressure on the housing market. We published an article actually, working on an article right now for the web site Stephan, that is related to what's been going on in Washington D.C. And oh my God, when you take a look at some of the numbers that they're facing down there in the condo market, it's just crazy. The number of units that they had planned to be built and now they're all faced with a lot of these people walking away who were going to buy these places and all the best plans in the world for the booming condo market have just dried up. So now everybody is saying, okay well all these buildings that we've got in progress, we're just going to reconfigure the floor formats a little bit and we'll convert to rentals, because the demand's not there for buyers anymore. Well, what the heck is that going to do to the rental market in D.C. and already people are saying they cannot make ends meet with their obligations renting units that they purchased over the past couple of years. So, and then you consider the adjustable rate mortgages, all of these that are coming due in face of the sub prime mortgage market. Basically all of the sudden hitting strong headwinds, the sub prime mortgage market has had a bunch of their lenders suddenly declare bankruptcy over the past 4 weeks and that's because they can't find the funding to complete a lot of the stuff that they had decided to do and a lot of these sub prime mortgages, and of course sub primes are for people who are of lower lending quality, people who probably 10 years ago never would have qualified for loan were getting loans over the past couple of years, past 4 or 5 years with the most lenient lending standards in history. And now of course those sub primes are starting to blow up as the economy is you know schizophrenic as ever.

Stephan : Yeah, and I think that the shake out will be interesting. I mean, left to its own devices this market could very well collapse [as] in 1929, and through the 30's. But I don't think that it will be allowed to collapse or that's a very real possibility. I.e. all the stops will be pulled out. And I think, and we have discussed this before Johannes and we have shared this with a lot of folks and there are some people we really respect out there who sort of, who basically believe the same thing. I think the Fed, what the Fed wants to show at least on the face of it is that they are you know they have quote, "inflation under control" even though they are complicit in creating inflation continually. But in the public's perception of inflation i.e. cost of goods under control. And energy, you know, oil is down to the 50 dollar a barrel level and we can talk about potentially that being manipulated down i.e. via the Goldman Sachs commodities index, of weighting their oil futures dramatically and it's not coincidence that the former CEO of Goldman is that the treasury's secretary alright? Now that's a whole different conversation. But oil is down some you know, you're still going to see some effects of you know the housing market it's going to have a trickle down, how bad, we shall see it could be very bad. But the Fed, I believe, and you believe is looking for an excuse to drop interest rates to re-stimulate one more time. The question is, will Americans in effect, will Americans go further into debt, and will Americans go further into debt. And I believe that that's the wild card. Because, because they may go further into debt, they may lube up the economy, but that said, if they don't, look for and do not be surprised for the central banks to step in an invest in the stock market. Propping it up, and if they do prop it up, remember, that's still a bail out. The numbers may go up, but they're going to buy you less and less, you're really going to be losing against inflation in the stock market against the real inflation rate also, but you know what, that's a bail out, that is inflationary just as a bail out of GM is, just as a bail out of a big bank is, etc, etc.. because the money comes out of thin air. And that's the main thing for our listeners to remember, when the Fed buys anything, they stroke checks out of thin air. They don't have the money and they'll admit it.

I think that's definitely what they're going to have to do and if it's not now, and I think it is going to be now because you look at what's happening as the foreclosure market continues to build and build and build and foreclosures gain more momentum. And I mean, you know we're not alone on this either. I mean you get and we posted up yesterday on vigilantinvestor.com , this is a quote from an article, and it's actually related to what Goldman Sachs just released in one of their reports. I think it might have been their annual report. This is the quote, "Americans have shown a complete lack of self control, " said David Kostin the Investment Bank's U.S. Strategist. Quote, "The personal savings rate is at its lowest point ever and has actually been negative since April 2005. We believe that housing will soon become the proverbial 'straw that breaks the camel's back'." That's coming from Goldman Sachs and this is just not as fringe as it used to be, you know 12 months ago we were saying hey everybody watch out position yourself correctly because this is going to start happening, we encourage a lot of people to avoid investing in real estate to get rich and doing the flipping thing, and even if it worked for you up to that point, knock it off. We'll here we are, and if Goldman is starting to talk about it in these terms, you know something clearly is wrong. Moving onward I wanted to tell everybody one of the things we came across in the past week, mortgage fraud not surprisingly Stephan has been on the upswing, and the FBI confirmed what a lot of people on our side of the fence know, especially those of a the Austrian school of economics who understand the dislocations and the craziness that ensues when you do all this money supply creation after year after year and cycle after cycle, but you just keep dislocating and dislocating and eventually it leads to fraud. And you know, we've pointed out you know, Casey Serin of iamfacingforeclosure.com, not to continually beat up on the guy, but he is the poster child of the fudging of the mortgage application getting 2.4 million dollars I think it was across 8 properties in 4 states and just sort of fudged up his income just a touch, and primarily his biggest fraud was that he stated that these were his primary residences and he didn't disclose that he was a graduate of several real estate get rich programs. But nonetheless, the FBI has confirmed that you know, of course you take that logic to the next level, you know your true criminal enterprises start putting one and two together and they realize that with all this easy money flowing around, the lending standards going through the floor where they're not even bothering to check your income or your residency or anything like that. They've concluded that actually organized crime is involved, that the Mafia has gotten into the game of getting people to artificially appraise homes and then they get the mortgages on them and they resell them to each to each other and bounce them around and drive the prices up. You throw that into the mix with real estate, and again, we keep saying this is the tip of the iceberg, but I don't think it's the tip of the iceberg, I think it's the tip of many icebergs we keep saying here. Not just one iceberg, it's a field of icebergs out there and then, there's the mortgage slash home housing, you know, grouping cluster over on this side of the ice field and then there's a whole bunch of others that we talk about that are unrelated to housing, that are equally as dangerous. And I'll tell you what, the fog is settling in right now, and you know, everybody is acting like there's nothing to worry about because they don't see anything beneath the surface.

Stephan: Yeah, I think that, and those are definitely the conditions that exist today. But you know, we're never surprised by the ability of those things to be pushed further and further into the future and I think that's what we have got to factor. You have to keep one eye on what's really going on there the gravity of the situation. But you know you've got to take advantage of it too. And again you've got to surf that inflation wave simply because you can make money on it. And what's going to happen is that money will you know, I think that, look there are a lot of, there's a lot of big money behind the stock market, i.e. in the financial institutions and it behooves them to have these markets continue to quote "do well at least numerically." But sadly, the average person doesn't pick up on the fact that, hey, Dow 12, 5 in "2000" dollars adjusted back for inflation is really Dow 10, 5 and the problem with that in 2000, Dow was 11, 7. So, although the number is bigger, what it buys is about 12 percent less. And the average person is never going to pick up on that. That said, I think it's important to also focus on those areas like gold, like silver, like energy, like one of the world's most you know, scarce resources, drinkable water, those areas you cannot print and you cannot inflate. And those are areas I think that people can focus on and not only tread water or somewhat slowly lose water let's say, as you do in the stock market to inflation, but can actually keep up with inflation and surpass it.

Yeah, it's interesting you mentioned that, you use the term what you cannot print and that's interesting because you look at it from the standpoint of you know one of the indexes we monitor is the USDX, that's the U.S. dollar index verses sort of a basket of 5 of the world's major currencies. And that is [limited total] because all the rest of the world's central banks are inflating as well at different paces than the United States, at different times, but the bottom line is that you know that's one of the reasons that you can see the dollar, and I think that the trend is going to be for the dollar to continue to lose verses other currencies, just because of the, I mean the severe financial strain that this country is going to be under, especially when you throw into the mix, the federal deficit. The real federal deficit, 4.6 trillion dollars. I mean where the heck is that money going to come from? That's just money we don't have. We didn't have it last year when the number was 3.5 trillion, if these numbers seem you know huge [...] and you have not heard these numbers before, you know you're familiar maybe with 318 billion as the official deficit last year, I think 260 billion this year, those numbers do not include the net present value of future obligations. Those numbers are not using general accepted accounting principles. It's the fantasyland down on the Potomac where you can get away with that kind of garbage, whereas anybody, if Enron tried to do it, well you'd go to jail. Yet, if you're a Congressman, you get reelected if you do that kind of crap. Bottom line is that we're functionally a long term insolvent if we are basically expecting to pay out all these promises that we've made to future. And, that's coming due, these promises are primarily Medicare, Medicaid, Social Security and when these baby boomers start graying, look on out. I meant that's just, you know, that's going to be crazy. So, you know but back to my point about the USDX as an indicator, even in the face of that, you need to keep in mind that while the U.S. is going to have to inflate, and even if it's you know going through gyrations right now to try not to appear as if inflation is going on, it's facing that future in the long run. Bottom line is that you know these dollars gain strength over the past week, but then you look at gold and you see, you know, how can gold and the dollar, I mean they're decoupled. Gold's going up while the dollar's going up, what the heck's happening? And that's basically because the dollar is, you know, we're trading it. And when you measure it against other currencies that are being printed out of thin air, well, it's relative to [...] in itself.

Stephan: Well, an again, well it is inflation and I think we have to remember, and again, you know we can you know what in to the wind about this forever and there are things you can do to take advantage of that. I think the first thing to remember is that the inflation is global, okay? And in the sense that the biggest export of the United States is inflation, as our government continues to print money or our banks continue to lend money out of thin air etc.. and our consumers continue to borrow, with money, and spend money out of thin air if you understand the fractional reserve banking system. You realize that we are continually, probably to the more realistic tune of about an 8 or 9 or even 10 percent a year increasing our money supply. And that's your true definition of inflation. But let remember this, and our listeners should remember this too, that other countries correspondingly print more money too, so their currency does not get too strong, relative to the dollar, otherwise their exports become too expensive, slash un-competitive. The Chinese, you know, they're pegging their currency to the dollar, okay there's not a lot of float there. And other currencies make sure that it does not get out of whack. And so as we inflate, the world inflates, which again makes a stronger and stronger case where there's necessary assets where you can't print, or real money like gold and silver.

Well, the interesting thing is that the cycle that we've endured, and I was talking about longer term cycles, I think it's important to consider the inflation in the U.S. of money supply in the context of the trade deficit, because so many people tell me, what are you talking about with this inflation, CPI, which is the standard measure of inflation. They always point out it's been very much under control, and in fact, you know, if you were to read the main stream media all the time, and watch MSNBC, you know the general wisdom is that yeah, inflation is under control, you know governor Greenspan, Sir Alan Greenspan basically tamed the inflation beast. It's almost like modern alchemy you know where you can print money out of thin air and the prices go down. I mean how about that, that's better than printing gold, you know, figuring out how to manufacture gold, which was the you know, for thousands of years people have been mixing potions to try to do that. And here, federal Greenspan, Fed Chairman Greenspan figured it out during the 90's, you know, just keep printing money and goods get cheaper and cheaper. Where's the inflation? Well, two points, one, CPI is largely a fictional number these days compared to what it used to be. It's been largely fudged downward, it has been manipulated, partially for political purposes. It has all sorts of manipulations applied to it, hedonics, substitution, all sorts of things, we've talked about this in the past, we're not going to get into it. But real inflation rate, if you measure it how you used to measure it prior tot he 1970's is dramatically higher than they're letting on to the official statistics, and of course that helps you balance Social Security, when you're adjusting the Social Security payments to inflation or other you know payment increases, you adjust it for inflation you know it's a win for the government, there so they have [...] to totally fudge because they don't have to raise taxes or tell people that you know really you're losing purchasing power each year with Social Security. They're not going to tell you that. So they have that vested interest in there but, beyond that, I think you need to look at it in the context of, where was I going there Stephan, I got off on a tangent now....Help me out...

Stephan: Well, when you're looking at the inflation rate, is really not what you say it is. And you're talking about hedonics, okay? And the fact that you know, an increase in gas is all the sudden artificially depressed because we have anti-pollutants in there or agents that are supposed to make the gas more efficient, or less polluting or you know, a computer goes up in price, but because it's faster you offset the increase.

Right and that's specific to CPI and back on track now, I was talking about the trade deficit and how that comes into play. Well, the other big thing that's really helped out Americans, and this is the double-edged sword, I mean this is you know, a blessing and a cancer at the same time. What you have had with the trade deficit since the, pretty much since the mid 80's has been the venting that has enabled the Federal Reserve, Alan Greenspan and his cronies, the U.S. government and everyone who benefits from the Fed purchasing securities outright in the open market, U.S. treasuries to fund the deficit and not make it so big or at least not make them have to go out and fund it publicly, that's you know, expansion of the monetary supply. All that stuff's going on but the trade deficit that basically has built and built and built over the last 20 years to the point where now it's gargantuan, everybody recognizes just how big that trade deficit is. And what has it brought to the United States? Very, very, very cheap high tech goods, cheap TVs, cheap technology, cheap all sorts of thing and of course you know you walk in most stores these days and you turn anything you're buying upside down and where is it made? It's made you know, mostly in China, or somewhere else. And that has hidden that inflation that otherwise would have just knocked the living daylights out of the U.S. consumer with hyperinflation. And the U.S. consumer, from the 80's and onward have been faced not just the monetary expansion you know pressure of inflation but also the regulatory and tax burden of inflation. I mean, when you regulate the daylights out of an economy, prices invariably go up, we see that in our own business Stephan day to day. The amount of complexity that we have to do purely because of regulatory oversight. Much of you know, which is you know, just one hand I understand the regulation on the flip side of it is you know, in our business for example and I'm sure a lot of other businesses if somebody still wants to steal money, they can still do it. I mean look at Enron, there are tons of rules and regulations and Enron still walked right around them and said the heck with it. And how many billions vanished in Enron, who knows. But the bottom line is that has harmed the U.S. economy as well as this monetary inflation, at least the monetary inflation, well I guess both were able to vent through the trade deficit. So where as a U.S. person, the average U.S. person progressively year after year has been less and less and less able to afford things made in the U.S.A. for both of those reasons, here comes the trade deficit to the rescue where all these goods and everything manufactured abroad come back to us and we can still make ends meet in the face of what functionally has been a declining you know, gross total compensation package for, or net compensation package for the average worker. I mean over the past 10-15 years, the average American family is earning less and less and less. You've got to have two people working now, all sorts of things.

Stephan: Well, that said there are those out there that argue that there are plenty, and you've got to listen to this side of the argument too. There are plenty of people still living out in the boondocks of China that have not even been brought into the manufacturing process, i.e. there's a lot of cheap labor that hasn't even been taped into yet. And there's the argument out there that this could allow the U.S. consumer to get cheap goods forever and ever and ever. The only problem is that you're exporting manufacturing jobs. And if our economy, you know the fact that, the crux of it all, the crossroads is the fact that Americans are not saving, they're into the negative when it comes to saving and they'll have to continue to borrow, alright? And whether they borrow or not is key, and interest rates will ultimately have to be dropped to do so. But if you have interest rate cuts, okay? You're going to be narrowing the spread between rates here and those of foreign currencies, and you could lead, it could lead to a run on the dollar, alright? And you know, not only by foreigners pulling their money out but, hey people that know what's really going on here at higher levels who pull their own money out too, alright? And then you're going to have a serious problem of illiquidity,. And they you're going to require more money or more liquidity to be injected into the system in an attempt to stabilize prices, but that is going to lead to hyper, hyper inflation.

And I think that, you know, again, back to the trade deficit again, I had mentioned that you know, it's a blessing and a cancer. On one hand it brings the benefit of cheaper goods so that the average consumer can say, well maybe I'm earning less, but look at how cheap things are getting. And that's the message you hear from most politicians who defend our apologists and most of your you know, economists, Wall Street, you know, types or court economists down in D.C., whatever you want to call them, you know, bottom line is they kind of say, hey, what's the problem? You know? Well the real problem is that this deficit is like you said, costing jobs. And we're exchanging jobs abroad and higher wage manufacturing now, maybe things were out of whack in the U.S. but we basically you know, and granted we did out price our labor artificially, you know, regulatory wise by tipping the labor laws overly in the favor of organized labor to the point where I mean you look at the agreements that GM had, I mean, you know, whoever thought those were going to last forever in a financially solvent manner, you know you were insane. And yet that was the norm back there. You know, give people 6 weeks and you know, an uneducated worker with very little experience starting him off at union wages that were far, far, far above you know, the non union market wage. You know that, maybe that was excessive, but on the flip side was you know I think the natural wage in the U.S. was obviously dramatically higher than your wage in China. But we forced the hand in on that front by keeping it high for so long than the U.S. and of course that side of it vented abroad. And it has cost U.S. manufacturing a lot of jobs. And now it's begun to bleed in over the past few years, also on the technology side. I mean who hasn't dialed up a some sort of a support line for a computer company or something like that where you're not talking to somebody, not here in the mid west, I mean it used to be that those support centers were in major cities, then they moved them into the mid west because it was cheaper. Now, they're out in India. You know somebody who is a tech support person, it's a matter of time before it happens with banking. I saw that, and this was already over 12 months ago, Deutsche Bank moved close to 2000 analysts or something like that into the third world, maybe it was 200 analysts, I may be over stating it but, you know that's a lot of people, but you don't have to pay you know 6 figures to move abroad. You know and just you know, someone with a good education in India or China, and that's the bottom line is, you know, they're just as capable. And you know heck a lot of them, people that have been educated in the U.S. now, and they're saying that India had some of the top universities in the world now. Not surprising and you lose your labor leverage there and it's going to start harming your economy on that front. And meanwhile here you have the Nancy Pelosis of the world that you know, demanding to ram through this minimum wage increase because it's been so many years since we've had a minimum wage increase. Well heaven sakes, it's not as if we have a lot of leverage when it comes to labor, especially unskilled labor, you know they're the ones that qualify for minimum wage. All that's going to do is incentify more U.S. businesses to ship their labor abroad. Those that can't, have to have pizza delivery boys, delivery people, are going to shrink their labor force and if you're stuck to do business in the U.S. maybe you go to robotics or new technology to replace that labor. The bottom line is it's either going to translate into lost jobs or higher prices. And that's not good for an economy that is definitely not you know healthy. And again, this trade deficit, all these cheap goods really mask a serious problem, and all the congressional fools have done over the last decade is fiddle around and pretend there's not a problem and go off and fight wars all around the world and do whatever else, wars against drugs, wars against poverty, wars against this and that. And all that does is suck more money out of the economy and either blow it up or you know, sink it into fiascoes in a different light. It's messy and you can't do it forever and eventually it's going to catch up to you.

Stephan: And you can take advantage of it. And people as investors can take advantage of it. I mean let's continue on with the scenario that we talked about. Let's say the Fed tries to lower rates this year sometime after a slowdown, which we think could very well come in the first quarter, or some type of a market drop or continued housing drop or quote "inflation is under control," and let's say Americans may bite on it and you're going to have more borrowing, being stimulated, borrowing, spending, rising markets etc.. and rising markets in numbers, and again that's inflationary. Now at some point in time, now it could be this year, Americans who are age 50, which is an age which people pull their horns in so to speak from a debt level, and the Japanese showed us that example 15 years ago, Americans may not borrow. These rates will, these rates to stimulate may be dropped and may be dropped and may be dropped. Now you could get a run on the dollar because of that, but you're also going to get a certain group of folks either foreigners who are here or who are quote "with it, or savvy," they're going to start borrowing dollars, okay to invest in foreign assets. That's because the interest rates will be very low and they might invest in foreign stock markets, they may borrow to buy gold, because the money's going to be cheap. And in fact what you may see even is the central banks getting involved with buying stocks in our market to prop the market up. But, in effect, what's going to happen is stocks and bonds are going to be dumped on the Fed or the central bank and those proceeds are immediately going to go elsewhere, or to precious metals, you know, other company stock markets. And when that happens, you're going to have a continuous depreciation of the currency here. So in effect as that money leaves, that's when you can have a real problem from a hyperinflation standpoint. And that's a very realistic scenario.

And I also think that, you had mentioned just to tie up loose ends, you mentioned that you know foreign central banks might try to prop up markets, but it can even be less deliberate than that, in that the end result is the same. But being desperate for yield is something that a lot of private investors and central banks are starting to scratch their head. How much, you know, this really, what is it, it's government debt that's issued. U.S. Treasuries primarily are what the Chinese have invested all their dollars into and those things are at 50-year lows. And you actually have central banks scratching their heads, maybe they should be investing some of those proceeds into the stock market. And you talk about inflation, I mean inflation is already depressed, I mean, again back to the, here we are back to the trade deficit. But all those dollars that we printed in the U.S. gets cycled around, and they go abroad and foreign spending foreign central banks are just stuck with them, what do they do with them? Will they go out and buy U.S. treasuries? So that drives down the interest rate that U.S. treasuries have to pay, and consequently it drives down you know the mortgage market rates, all that kind of stuff, so you get a housing bubble, if that, you know continues to gain momentum, the whole recycling element there. But at the same time what it's done is it's driven down the risk, the spread between low risk and high-risk investments. Yield starved return interest rate return starved investors cannot you know get their interest that they need by going into your traditional you know, 30 year treasury, your shorter term U.S. treasury. So, what do they do, they start going into higher risk investments. And that's were the sub prime mortgage market had all that liquidity for a long time, which is just right up, which is a problem again another tip of the iceberg, what we talked about. But that again is yield starved people doing what they wouldn't have done absent that inflation having. And that gets into that dislocation factor in an economy, which causes a lot of things to break. And I think that we've reallocated all these resources with inflation. Because remember, any purchasing power that you get from a dollar that's been inflated that's been minted out of thin air comes at the expense of existing dollar holders. The wealth that that dollar now contains was literally stolen if you will from others out there who hold dollars. And just without their consent, they're obvious to it because they don't understand how inflation works.

Stephan: Well yeah, again, I think the important, people are also listening for, you know, God what do I do? What does the average person do? And while this show is not about giving financial advice, I think an intelligent way is to, there are things that people can do to combat this and take advantage of it. And I think that you know, in effect, and we keep talking about it, but gold and silver, in effect, they are a cash [...] and it's money that you cannot counterfeit, it's money that you cannot, that you cannot print out of thin air as we keep saying. And I think it's really important because, we have been in a serious inflationary phase since 1982, since Reagan started going seriously into debt to defeat the Russians in the cold war with a ton of deficit spending in government borrowing, which opened up the spigots and greased them for the 90's with a lot of consumer debt and borrowing, which flowed back into our financial markets, which then spilled over into the housing market. Now it's spilling over into the supermarket. If you talk to folks, you know, they're saying, my God I can't believe how much things are costing me when I walk down the aisle. And I think it's important to point out that we are still though, if you think of a rocket lifting off, you know, down at, a NASA rocket lifting off and all of the sudden the tower sort of falls away from the rocket and it starts powering up. We're not far from that in the light of where inflation probably really will go. True inflation.

Well and I think the end game clearly is the federal deficit issue, with it being 4.6 trillion. Again, where the heck is that money going to come from? You can tax 100 percent of all personal income in the U.S. and don't have the 3.5 trillion that it would have taken last year to cover that real deficit. So, 4.6 trillion, forget it, they're just going to roll it over year after year. So, where's that money going to come from? They're going to more than likely have to print it.

Stephan: Right, and that's inflation, and that's massive inflation. So we keep talking about that, but really I mean, you look at gold today and it's not always a rocky, or a smooth ride. It could be somewhat rocky, but hey, gold up 8 dollars today at 636. Even thought you keep hearing talk that crude oil futures area climbing right now a little bit today. And we may have hit, there are some that thing that we have hit the low as to crude oil and that we in fact could see it back around 60 or 70, not so far in the future, and there are some that say it could hit a hundred dollars a barrel. And -

With both of those items too you have the issue, I mean, why are those prices going up and again, we're not recommending that people utilize either of these as investments or anything like that, but the bottom line, you know, we're here to observe, you know, what's happening out there. And I think that what you're seeing reflected in oil prices, and in precious metals as well, but with oil specifically is again, you can't print oil out of thin air, number one, and number two, you're also faced with declining reserves out there. They [...] find any of these gigantic gargantuan reserve fields out there, oil fields out there, those things are long gone even if you go up into the north sea and those things are plummeting, I mean their reserves and they're fairly honest about it, you can never get a straight answer out of the Middle East as to exactly how much they have sot you have to rely on their estimates or what they state and of course that can be politically loaded because it's a you know, you don't reveal your cards in the Middle East, I'll tell you what you're liable to have some problems as to who is going to support you or not. But again, those are things you cannot mint out of thin air and gold is in a similar position, in a different sort of perspective precious metals do in that you know gold and silver primarily have historically been currencies. And you know a thousand years ago gold was a currency, a hundred years ago, gold was a currency and we've kind of gone to this modern experiment where we have gone off of the gold backing and the discipline that's usually implied by it. And consequently we have this hyper inflationary environment and at least it's measured by, not necessarily in prices, although that's liable to change, but rather in terms of the expanding money supply, you just look at the bottom line and the vast increase of money supply over the past couple of years is crazy.

Stephan: Yeah, and you know, I agree and I think you're right. So, but I do believe that there's been artificial inflation in things like energy and I think that you know, it's a great hedge also. And you know again, do not be surprised and if we are never amazed anymore at how far this can be pushed off. Okay, but the whole ride though is an inflationary ride, when ultimately you're going to have an inflationary lift off. Potentially like we've never seen before. And this could go on for years.

Yeah, and I think one thing we also need to look at as a potential flash point for the economy as whole is just how dependent the United States has become on low interest rates. And so long as we have that recycling trade deficit, and I keep going back to that trade deficit, but you know we've increased the money supply in the U.S., it gets vented abroad, you know it comes back into U.S. Treasuries, drives down interest rates, and as long as those interest rates have been low, you know we look at the whole housing bubble as a byproduct of low interest rates, mortgage rates are tied to U.S. treasuries and consequently as rates drop and drop and drop, so do monthly payments, once those things bottom out, you still have that liquidity circulating through there from investors yield hungry willing to enable adjustable rate mortgages and other exotic forms, interest only mortgages, things that were you know thought completely unjustifiable you know 15 years ago are now the norm, I was just reading that something close to 80 percent of mortgages in San Francisco in the last 12 months were adjustable rate, or maybe it was in 2006. That's just a crazy amount, because you know, as long as interest rates stay low and you can keep flipping over your adjustable rate into a mortgage you can you know, maybe sing a nice song there for a while but eventually foreigners are going to have to say, wait a second, what is going on in the United States if people are not saving, they have this housing bubble and the prices have stopped rising. How many people, you know, we've seen the tip of the iceberg on mortgage fraud, we're seeing you know a lot of people who were speculators in the condo markets starting to get hit now. And that starts reverberating around especially in the face of that 4.6 trillion-dollar federal deficit. Foreigners are going to start saying, well heck, why do I want so many of my reserves, like China has over a trillion dollars of their reserves in the U.S. dollars, why do I want to have all dollar denominated assets? Why do I want to have all these treasuries paying 50 year low interest rates, I need to diversify. And already you're hearing that talk from some of the smaller central banks, you know especially in the Mid East, of course they have the political side of things. But again, the political side of things is just as important. I mean you have Venezuela and Iran you know, teaming up and saying, you know help countries that are not pro U.S. in terms of economic policy etc..etc.. You have Putin now who is looking out for his interests in Russia, at the expense of you know Russia first. And you know, he's not going to hold the dollar any longer than he has to. He's looking out for Russia's interest. So it's a matter of time before those interest rates start rising up, and that's a new vice that's going to be applied sometime, don't know when, but eventually rates will begin rising and when that happens, you want to talk about pressure on the housing market, you want to talk about pressure on the heavily indebted U.S. consumer, you want to talk about pressure on that entire U.S. debt. I mean that sucker is at what 8.6 trillion dollars already? And we managed to re-fi that over the past you know, 5 years at generational low interest rates. Well when that stuff starts coming due and you have to start re-fing at higher interest rates, well there goes your debt starts climbing even faster. We're not paying off that debt, we just keep piling it on and piling it on. So again, that's another side of the equation that people need to look at relative to the U.S. economic [...] and then consequently you know some of the global wealth as well.

Stephan: You're right. You're absolutely right, and I think that, again we're going to see what happens here. But I think that, and again, don't be surprised if this trend continues on and you see a 20 thousand Dow before it all happens, or a 30 thousand Dow, or continued economic activity. I mean you know, we've chatted about this before, there have been people in the 70's who have called for the end of times in the market, here comes the big collapse, and in the 80's and in the 90's. And I, without being conspiratorial, but just understanding history, understanding human nature, you know, money is powerful, people that run financial institutions are very powerful, the government is very powerful and in effect they can prop things up. And our government, the Federal Reserve, and the financial interests that run the fed have propped up major banks that were failing, have propped up major automakers which have been failing. Why wouldn't they continue to prop up the Social Security recipients. Why wouldn't they continue to prop up the stock market and who knows which of those banking houses is involved in the Federal Reserve? Okay? And there's a lot of self interest there, think about it, if the Federal Reserve can create money out of thin air, i.e. to buy government bonds, basically allowing our government to print money and in effect, printing money and charging interest on it, and that Federal Reserve is made up of potentially people who are seriously interested in the success of the financial markets, come on. I think that it could definitely continue for a long time, and to be on the demise immediately, it could happen, okay, the markets could collapse, but to bet on it is to bet against some very powerful interests. And I think the safer bet, the safer bet is to take the inflation and take advantage of it, because inevitably, undoubtedly, the money supply is going through a lift off phase and will continue on a global basis and increase exponentially and you need to take advantage of that, because you can't change it.

Yeah, I think that's definitely what's coming down the pike. And I think what the Fed right now is running, you know, I'm not saying it's going to happen tomorrow, but you know, anything can happen. There's the old saying in the market is you know, the market can remain irrational dramatically longer than the average investor can remain solvent. And that's important to remember because you know even if you're fundamentally right on a lot of issues, you're going to find that things happen, because people continue to operate that way. That's the weird thing about the market. And it flies completely in the face of the efficient market hypothesis. And I guess in some ways it supports it, but the efficient market hypothesis out there it's viewed almost as a golden rule in the law of physics if you will because people forget that it has hypothesis at the end of it. But it basically states that generally the markets are efficient and therefore there's not a lot to be gained by trying to outguess the markets, because the markets have all the information and things are priced accordingly. There's not, you know, really a whole lot of sacred information out there, but it's a lot of garbage because I mean if you look at what happened in 2000 with the dot.coms and technology, I mean the Nasdaq dropped what, 78 percent? Tell me the markets had all the freaking information there, I mean come on. And yet you have an entire industry that keeps preaching efficient markets, efficient markets, efficient markets don't worry about it. But you know, I think there's a lot of potential that you know, once everybody realizes that they've gone completely to one side of the boat, there's usually a stampede to the other side. Maybe that's not the best analogy but I think if everybody starts heading for the exit, here's a better analogy, all at the same time, you're not going to be able to get out all at once too. Which leads me to say to people, well look, this environment is unstable and even if a lot of people are apologizing for it and say that, hey don't worry about this or that, it's a new environment, it's the new economy and we've hit bottom and it's all upward from here, we've heard that you know, time and time again. Be cautious, be very cautious. And again, you could see a 30 thousand Dow out there, at the same time I think you're going to see that, you're going to see tremendous inflation, but just as easily, you could see people and this is the risk that the Fed, I mean the Fed is dancing through the raindrops right now. You know, Bernanke is between a little bit, between a rock and a hard place. I mean everybody is talking about Goldilocks economy, you know not too hot and not too cold, but he's got an economy right now that is simultaneously giving signs of being both too hot and too cold at the same time. I mean you look at the housing market, too hot, starting to cool off, okay? And what about oil? Or excuse me the housing market is getting to cold, it's cooling off and it's beginning to drop down. The condo market, look what's happening there. And people need to watch out. But at the same time, you know it will come down a little bit but what about gold, what about other prices, what about you know certain commodity prices [...]

Stephan: Johannes, what about wages? Potentially, what about inflation? Potentially too hot. What about wages, too low. Okay, so you know it's a rock and hard place that the fed lies in between.

And where I was going with that, he increases money supply too much and drops interest rates too soon, he could see inflation take off and out of control, but just the same if he tries to increase rates and tries to ward off inflation further he could drive the housing market into a problem. And you know you could see a run on the dollar, you could see all sorts of issues. It's you know, again it's not a stable environment. Hey we've got to wrap up here, we've got about 5 minutes left in the show and I just wanted to hit on a couple of points and you know we're kind of grinding the same axe there a little bit. But, a couple of news articles I thought were worthy or I guess news headlines worthy of talking about. Bernanke himself has warned that entitlement growth can harm the economy, and that's from the New York Times today. He basically said basically that, and I'll just read directly from the article here, "Warning against complacency over the federal deficit, the Ben Bernanke, the Federal Reserve chairman, said Thursday that recent positive trends on the budget were a "calm before the storm," masking a long-term danger posed by looming deficits in Social Security and Medicare. "The longer we wait, the more severe, the more draconian, the more difficult the adjustment is going to be, I think the right time to start is about 10 years ago." And there's, again you want to kick him in the pants because this is the same organization that has enabled it to happen though you know the fractional reserve banking system and inflationary policies. I mean the whole reason they're able to pay for this is because they're printing money out of thin air. If you had gold stabilizing this, they'd not be able to do all this deficit spending and so forth and they'd be shackled by that. But instead they continue to believe, ah we'll just print more money to cover it to paper it over. And I think that's, again we hit on that already. But that's again, Bernanke basically telling it like it is, a little bit candidly there. And you know, again on more tip of another gigantic gargantuan iceberg.

Stephan: I think it's an important point because you know when the Fed chief speaks it's typically an understatement or tends to be an understated tone, and you know, i.e. Fed speak. But this is pretty strong, if you look at Bernanke's quote, "if early and meaningful action is not taken the U.S economy could seriously be seriously weakened with future generations bearing much of the cost." And I think that's interesting, because now you have the Democrats in power, and to our listeners out there we are neither Democrat, nor Republican. You have the Democrats in power who are now going to quote "come to the rescue of the average person in their own minds anyway," and with money that they don't have alright? And we've seen minimum wage hike, but I want to see a politician, Democrat or Republican have fiscal responsibility without keeping on jacking up taxes, okay? And early and meaningful action means the system's got to be revamped. And early meaningful action means to admit that there is not Social Security trust fund, and to admit the last time Congress raised taxes to quote "parade the trust fund" in 1982, both the Democrats and the Republicans basically defrauded the American public by saying the money would go, that what is not paid out in current years will be put in a trust fund for those years when you have not enough young people to continue to pay for the growing amount of older people. They defrauded the public, because they knew that the 1939 Social Security Act requires any access contributions not paid out in a current year to be invested in government bonds. Hey folks, when you put your money in government bonds, it's immediately spent. It's a loan by the government, so - what's that?

Who owes, who has to pay down those government bonds?

Stephan: We do. We do.

Hey Stephan, here's an investment proposition for you. You invest your money with me, okay? I spend it, okay? Now each year, okay, I'm going to pay you back let's say 20 years from now, the entire amount that you gave me plus I will give you let's just say 7 percent interest on that compounding, okay? Now each year, what you're going to do after giving me that initial deposit is you're going to pay me more money, okay? And I'm going to set that money aside, and then a the end of the 20 year period, all that money that you paid me over the past 20 years, I give it back to you as your return of principle and your interest. Good deal?

Stephan: It's a lousy deal and no one would do it in the private sector, you'd get laughed out of the room. And the point is, hey America, you were told that your taxes were going up so that there would be enough money for when you were around, they raised your taxes specifically for Social Security and they spent it on other stuff. Right?

That's the U.S. treasury market right there and it's just not you paying it but it's you or your kids paying it.

Stephan: And that's your government and that's your government and those are your demagogues. You know, I know we have to wrap up Johannes, we can talk about this later, but I'm reading Aristotle's Politics. And it's really intriguing talking about democracy being a perversion actually of a constitutional government. And at the end, democracy is always subject to the demagogues. And it's really, and it's really, really intriguing. And another thing that he talks about is that what prevents revolution is a strong middle class. And what's happening to the middle class in America, they're getting crushed and eroded and that could lead to potential problems. So that's maybe something to talk about next week.

It is indeed and just to, we're talking about, one other point I wanted to make. We mentioned that the, you know, here we have on one hand Bernanke saying that the benefits and everything, the giveaways are going to catch up with this country [...] the time to start with 10 years ago. Meanwhile, what are the Democrats doing just to, again we talked about minimum wage, but now Nancy Pelosi is all excited because they managed to cut in half the interest rate that students have to borrow for college. If you are considered to be a low-income person and on one hand that helps you to afford college. And I can understand someone who doesn't have a lot of money looking at that being really good, but again we wonder why college prices are exceeding inflation. Where do you think that money is coming from? From the banking system? A very inflationary fractional reserve banking system, below market loans, just creates a lot of liquidity and again, it's just another you know, cog in the wheel of inflationary, gigantic inflationary problem we have. And these politicians just don't get it. Or, maybe they do and they're more interested in just you know, buying votes. And probably a little bit of both. But like you said, it's probably time to wrap up Stephan, so any final closing comments?

Stephan: No, I think that we should keep our eye on the ball, and I think that surfing the inflation wave and leveraging it is the order of the day.

Absolutely. And again we are on every Friday at 3:30 PM. You can tune on in to Vigilant Investor live, this is your host Johannes Ernharth, and co-host Stephan Ernharth, vigilantinvestor.com, daily publication, you can check out our journal there. You can also visit talkshoe.com, click on through to our site, we're show 982, talkcast id 982. And always feel free to join on in, we'd love to have you on board. And if you have any questions, go to vigilantinvestor.com we have comment forms there where you can type on in any questions you want to ask us and go from there. So we look forward to hearing from you listeners. And tune on in next week, 3:30 PM, Friday. And until then, everybody take care, this is vigilantinvestor.com.

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Definition of the Day Bond Mutual Fund

Bond Mutual Fund - Bond mutual funds often focus on a particular type of bond such as municipal bonds, other government bonds, or corporate bonds. Municipal bonds are not a matter of Federal income taxes. You can steer clear of state taxes if you pick a...

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