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The HMI Index Explained

Posted On: 2006-10-04
Length: 49:21

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Hi everybody, thanks for tuning in to tonight's edition of the Vigilant Investor, the live streamcast, sorry for the short delay. I had a few technical difficulties with our normal digital log in to the system but we're going to do it from the phone tonight and hopefully everybody will hear us clearly. First off if you want to call on in, and if you have any questions during our show, you can, well for starters, you can visit talkshoe.com and you can see that there's a live icon right there in the center of the page there if you go to their listen section, where the live broadcasts are being streamed from. And if you go in there you can get this information as well as download their Talk Shoe interface for doing, what do they call it, I guess it's instant messaging. A little bit of a different environment, but also, if you want to call in with questions (724) 444-7444. You want to enter talkcast id. 982 and when you dial in 982, and then it's going to ask you for a pin number, and if you haven't created your own pin number through Talk Shoe, we have one available to callers just to ask a question and then move on. And that number is 111-222-3333. That's 111-222-3333. But, in any event this is Johannes Ernharth, and thanks for tuning in to tonight' s Vigilant Investor streamcast and Podcast as well available on iTunes and also available through our web site the vigilantinvestor.com, we're on every Wednesday night at 9PM, give or take a few minutes as was the case tonight. But, 9PM is usually when we're starting up without the technical difficulties. But, a lot of stuff to talk about today, most importantly is, well heck the Dow Jones Industrial is breaking records here, two record consecutive days, where we look at you know since 2000 we haven't had a record in the, any of the equity indexes because of just the big downturn. We had the 1999, 98 euphoria and all the commodities led by technology and so forth. And once things started reversing it all began to crumble as we all recall all too well if you were involved with it. The Nasdaq began falling apart, following I guess the dot coms, and everybody knew the dot coms were pretty wacky. But I don't thing a lot of people expected that the Nasdaq would start falling apart as badly as it did. Folks suspected that the dot coms would [...] but then sure enough, despite a lot of assurances from people in Wall Street and a lot of economists that the economy was fine, the markets were genuinely fine maybe it was just blowing off some steam with what was going on in the dot coms, the sock puppets and all that kind of stuff, and 26-year olds getting hundred million dollar rounds of funding with zero profits all that garbage. And when it started bleeding into the S&P 500, the Dow Jones Industrial well suddenly you had serious, serious concerns and if you look at the past couple of day, where has the Dow been? Well, we're looking at, pulling up a interday chart right now but we closed today at, I'm looking at the wrong figure here, I was looking at the Nasdaq which was up itself, but the Dow Jones Industrial 11, 727 today as it closed. It's interday high was, excuse me the Dow was 11, 850 excuse me I'm still looking at the Nasdaq there, a little chaotic on my end here. Bear with me. And, with that, the Nasdaq also does very well today the S&P 500 did well today, and we're getting a lot of talk on your MSNBCs, your CNN and everything there's a lot of positive talk about how the Dow has finally restored it's highs from 2000, it took a lot of work for it to do it, but the past 2 days it finally closed after having some interday highs where it tested, you know, new highs but just couldn't quite stay above the interday high. But today again at 11, 850, which is a heck of a high given where things have been. And we look at you know the past month you know we were as low as 11, 385, we go back 3 months ago and we were, you know wobbling around but see 3 months ago, closed with 11, 151, 6 months ago we look at 11, 203 and a year ago boy, it seems like forever we dipped down as low as 10, 216 and that was in mid October of last year, started off October of last year at 10, 441. So we've come a long way in 12 months. It's a great return if you're just investing in Dow type stocks and so forth. But, the important thing that we wanted to talk about is why are we getting all these highs in the Dow, the S&P and so forth when a lot of news that we heard to day was not all that great. And the past couple of weeks I think it hasn't been all that great I think a lot of people are aware that the housing bubble has begun to leak, not just leak a little bit but leak a good bit, and even today Federal reserve chairman Bernanke said that the U.S. housing market is in a substantial correction, that will lop off about a percentage point from economic growth. And that's something to contend with when you're dealing with, you know, a lot of other news and lead your regular listener to our show or regular reader of vigilantinvestor.com you know that there are a lot of structural headwinds that are facing the U.S. economy that a lot of people are ignoring. But when Bernanke basically confirms that the housing market it is in a substantial correction when months ago folks were talking about whether or not there was even a bubble, that should raise a lot of hackles out there because housing has a tendency to lead the markets oftentimes and lead the economy. When housing slows down usually the economy slows down when housing slows down dramatically, the economy slows down dramatically as well. We were looking at the HMI index which is sort of the housing sentiment index out there that is done by the homebuilders association. And when you look at that as a leading indicator of the S&P 500, it leads by about 12 months, at least it has for the last 10 years, the last decade since early 1996, where you know it pretty much syncs up with pretty much an 80 percent correlation. So when your seeing that serving as a leading indicator over the last decade, when the HMI just falls off the face of the earth, which is has done over the last 12 months, it makes you wonder about the S&P 500, is it going to follow as well? That's nothing that's all that out of the ordinary but it seems like a lot of people seem unperturbed by that given that the markets are hitting new highs in the midst of news like the you know, what Bernanke said. Just the same today ADP released its private sector report, which came up pretty much as analysts expected, but analysts and economists have been expecting jobs to be weakening. And for sluggishness coming up in the next month, the labor department's releasing it's September nonfarm payroll growth on Friday and a lot of people expect that number to be showing slowing as well and yet you know the Dow Jones industrial is rolling right along to supposed record highs now one of the things we're going to address a little bit is this really a record high? And flatly out it is not a record high, but we'll touch on why that is. Separately, we're looking at the Hudson Employment Index which is a survey of workers out there that basically shows that they're feeling the least optimistic they have about hiring prospects that are lowest since September of 2005, so they're not feeling that great. Another negative on the economy and so forth in terms of sentiment. You have it confirmed also with the institute for supply management which has an indicator that oftentimes mirrors what you can expect coming out of the Federal Government's official numbers but it's non-manufacturing import came out today, it showed that the business index went to 52.9 from 57 showing weakening in the service sector. You know, above 50 is growth, so it's slipping down to 52 from 57 now it's showing that growth is beginning to slow. Another confirmation that we're slipping into recession. And, or potentially slipping into recession. And earlier in the week, the same group, the institute for supply management released it's PMI which had dropped to 52 as well from a reading of 54.5 in August and now it's a month drop again, economists had actually expected a reading of about 56.2 which shows that things have actually reversed from expectations there. So, again in the face of that, the past 2 days that was really [...] on Monday, the past 2 days what has the Dow done? Hit new records. The Dow is important to be understood is that it's one of those numbers that maybe isn't or indexes that maybe are all that important to the investment industry itself, but definitely gives a lot of confidence out there to people who flip on the news and they hear all the hubbub about the Dow hitting new records, you know again the 30, the Dow 30 is a definitely sort of a larger kind of company that's considered to be a little more growth oriented, maybe there's a safety element there that I think some of the investment community looks with the Dow which also might be one of the reasons why we're money flowing in that direction driving the prices up but nonetheless it's happening in the face of weakening numbers. And it's also interesting to see that even though the Dow has been flirting with these higher numbers, generally speaking the Nasdaq and S&P have not been pulling their own weight until today when we saw a full broader, much broader rally in the markets across the board. Now, all together we look at some of the other issues today, oh boy, bonds, yields extended their decline today after a Federal Reserve Bernanke's comments. In other words when bond yields are dropping and that means basically that existing holders of older rate bonds are getting a gain in their market value and so forth. But really what you're getting is, is showing that demand for bonds is up. And that's ordinarily a recessionary indicator. Now if we take a look at what's been going on with bonds over the past month, the past 3 months actually, you'll see that the yield has continued to be inverted. The last week for example, well, let's just take a look at today. Right now the 30-year is at 471 as a yield, and the 6-month is a 475. When you have a shorter yielding bond giving out a higher yield that the 30 year that's called an inversion and the 475 for the 6 month is higher than the 2 year, which is 457, which is still higher than the 5 year, which is 448, and the 10 year is 455. So, we've seen a little bit of a blip up there. If we were to go look at last week's numbers the inversion was a little more extreme and the week prior to that it was even maybe a little more extreme. But, what we've seen in the last, boy, how many weeks here, take a look at bonds, I think the 30 year bond has dropped by about a half a percent in, you know a very short period of time in about a month's time. Let's take a look here at the numbers, in terms of its actual yield, or its actual rate. Now, I don't have the number in front of me here, but I do know is what's happening is it's beginning to benefit people who are mortgage shoppers right now. Because what a lot of people don't understand is, they hear the Federal Reserve perhaps is dropping interest rates, and that's always sounding good, or they're raising interest rates, and that's you know neither here nor there when it comes to the treasury bond market. Now that might drive the short end of the bond markets, the 3 month or the 6 month, when you're looking at very short term, even 30 day type paper for interest rates, but when you start getting into the longer, further out treasury bonds, the 10 year the 30 year, it is the market that drives that. The market's confidence. The Fed can only do so much other than really they're limited to going out in the open market with the Federal Reserve's own ability to print money out of thin air and buy those bonds in order to keep yields low. In other words what they do is they literally go out and purchase bonds off of, out of the treasury or out of the open market, and by doing so they're creating money out of thin air, injecting money into the system and they're creating demand for bonds, and what that does is drives the return that you're getting on those bonds down because it's supply and demand. Bonds aren't going to give you an any higher rate than what the market's going to demand. And if there is a tremendous amount of demand for bonds the rates will be lower. So we've seen a lot of that but, the bottom line is that if we were to go back and look at the yield history over the past 3 months, six months, we saw that bond rates were, boy the spread between short term interest rates and long term interest rates, when you're looking at the 3 month and the 6 month we're down close to 1, and that's largely driven by the Federal Reserve having interest rates at a [...] Generally the 30 years hovered around 5, dipped down as close to 4 back in 03, and also dropped down probably 4 and a quarter or so down around September of last year and May of last year it was around that. But what we've seen since the federal reserve began raising interest rates consecutively, I think 17 times since June of last year, is that the short term interest rates have all sort of converged together. Now, interest rates about this past spring, April, May, were really starting to go high. Bonds were, the 30 year was up around 5 and a quarter, 5.30, pushing 5.40 and what that was doing was effecting the mortgage market and we started seeing mortgage rates going up higher and higher. Now the mortgage bankers association today released its index of applications and what we learned from that is that the applications for re-fi's or new home purchases jumped by just under 12 percent, 11.9 percent last week. Now that would seem to coincide with what happened last week in the bond market, which is that bond rates started rising. And as you start having rates rising and yields rising, that tells you that demand is starting to fall off and as rates rise mortgage rates are going to go up with it. Now, it's important to tie in the real estate market, what's going on right now out there. If you've been under a rock, maybe you don't know it, but adjustable rate mortgages are one of the biggest concerns that you will here talked about out there by pundits and so forth who are watching what's going on in the housing market. And adjustable rate mortgage basically enabled a lot of people to get in with 1 year, 3 year, 2 year teaser rates that were much, much, much lower than what you would have for a 30 year mortgage, it enabled you to get into a home with a much lower payment as long as that rate was low. The problem with adjustable rate mortgages is that eventually they reset at their preordained time and then they're tied to prevailing interest rates. They're tied in the liquid market out there. When that happens, conceivably you could have your mortgage payment double if the interest rates have raised. So what you have going on right now, is a lot of people facing that because, with the housing market going up like it did in some areas that went up over the last 5 years, you know 100, 125 percent in area's like San Diego, and Miami, you get into Washington D.C., Boston, San Francisco, a lot of these areas were just going crazy with the prices. So as the prices were going up the average person could not afford a 30-year mortgage, even though the 30-year mortgage was at a 50 year low. Now, something is rotten in Denmark when you cannot afford the 30-year mortgage in the average home in your community. So, what a lot of people had to do is they had to go to the adjustable rate mortgage, and when they went to that adjustable rate mortgage they were able to fit in the payment, but it was really like a ticking time bomb. And now here we are today in 2006, you know we're three quarters of the way through it, now this year we're expected, I think starting half way through this year, June, on a rolling 12 month period, about 1 trillion of adjustable rate mortgages are coming due over that 12 month cycle. So we're already one quarter of the way through that to next June 30, and then the following 12 month cycle, there's another 1.2 trillion or so that are coming due in adjustable rate mortgages as well. So what we're seeing right now is a heck of an opportunity for people to lock on in. And I think that that Mortgage Bankers Association, the MBA index of applications to buy a new home or refinance jumping up 12 percent last week was jumping along with what was going on in the treasury yield curve. When the 30 year started going up and the 10 year started going up last year, I think people finally realized maybe it's time these interest rates can't stay this low and maybe this is just a temporary break, we better jump at em when we got it, because this is as low as it's going to go and we certainly don't want to be stuck where we were you know 4 months ago back in April when we were staring at the average mortgage rate, you know getting close to the 30 year up around 7 percent. Now the average right now on the 30-year is about 6.24 last week, that was up from 6.18 percent prior week, which was an 8-month low. So, you know, again jumping up from 6.18 to 6.24 people were jumping at that. So, just a little interesting thing there and also you know an indicator that people are moving and shaking but again getting back to you know, is this good news for the day or not? What's actually going on? You know heck, when you're seeing big jumping in the application I guess on one hand, you could say that you know, at least people aren't being stupid about their adjustable rates, their jumping at getting out of them before their heads are on the block, but it's very important that people if they do have these things try to get them restructured, because when you're at well below interest rates averages for your mortgages, and you're tied to one of these adjustable rate mortgages, the last thing you want to do is be asleep at the switch and all the sudden find your rate doubled, should interest rates go against where you are. And in the end, you're adjustable rate for the teaser period is going to be so far below market that when it does adjust, you're still going to be seeing a substantially larger payment, even if interest rates stay where they are right now. So, all that said, other news today, well, Wal Mart cut it's September sales growth estimate by a half percent to 1.3 percent. You know, down from 1.8, that was as of September 30th, that was the number they had released a couple of days ago. So, they had this really quick revision in just a matter of days and Wal Mart declined to explain why they decided to reduce their estimate so dramatically, but Wal Mart is one of those bellwether type companies, I mean, it supplies the United States with all sorts of things. I mean it's the number one retail establishment out there. The average Joe shops at Wal Mart in the U.S. While Wal Mart is beginning to cut its growth estimate by a half percent which is a dramatic you know, revision for just a couple of days later, you know what's going on in retail? We know we're sliding down into a potential recession, a lot of other indicators have suggested that for well over a month now, and yet, what does the Dow Jones Industrial do? Just rallies on along to its new high. So, you know, boy, you know a lot of people are saying well, what about energy, oil, gas prices, isn't that great. Well, you have to concede that oil prices have come down, we were up at 78 dollars just a couple months ago and now we're trading around I think 58 it was today before it went up to 59 or so, and it was as low as 57, I think trading at one point, 57 and three quarters today before some [...] to raise up I think it was a refinery issue, for one of the major, I think Valero had an accident, one of their refineries and so forth. But the bottom line is with oil and gasoline, unleaded gasoline, which you're going to find is that in the fall you're going to go thorough this conversion period where demand definitely declines. You don't have the summer driving season anymore, so a lot of people are not just having the demand for gasoline as well, you also have a lot of people coming off of the reformulated gas which gets to be a little more expensive and pricey to produce because they have to do extra things to make it extra environmentally correct. And the third issue is when you're looking at the issues for things like heating oil which will eventually pick up, you get a break on that as well, because September and October are generally fairly mild months before you really start getting into the colder parts of the winter, especially in the north, north east areas of the country. But, one of the things we talked about last week, and this is where we get into, you know, referring to the title of our show today was, you know, considering what is going on with politics, elections the markets and the economy. The Golden Sachs commodity index was tweaked just a couple of weeks ago and we're all very happy that our unleaded gasoline prices are so low at the moment compared to where they were. I mean the average price was 3 dollars a gallon, and now we're looking at a lot of areas flirting with just about 2 dollars, some are under 2 dollars a gallon. And that's, boy, it's a heck of a break. I certainly don't mind having, you know to fill up the tank and it costs a whole lot less and you can see that with a dollar drop in the price of your gasoline per gallon. But, Goldman Sachs, what they had done is tweak their index. And, everybody is thinking, you know, why is this happening, is the economy doing well, why are prices dropping so much? Well, the tweak in the index is an important thing to understand, and a lot of people haven't reported on this, a lot of people aren't even aware that this kind of thing went on but, Goldman Sachs has what's called a commodity index and it's just like the S&P 500 in that, the S&P 500 is 500 largest stocks, well Goldman Sachs has a weighted index of commodities, and it includes all sorts of different things from oil, unleaded gasoline, industrial metals like copper and zinc and so forth and aluminum, all that kind of stuff and it gets also into agricultural things, so you have wheat, sugar, corn, all of that blended into an index so you can get a rough idea of what's going on with commodities. And that can be an inflationary indicator, if the commodity index starts getting driven up, it tells you that prices are generally going up, or that speculation is going up in commodities. Now, commodities of course, the indexes have been very, very high over the last couple of years. If you've been under a rock, or not paying much attention to investing, you wouldn't know this but pretty much since 2000 equities have been sagging and really haven't returned to their prior highs until the past couple of days and that's only for the Dow. Commodities have been booming, and a lot of people have asserted that they were in a bubble and now they're saying that the bubble, it got so extreme, that eventually is was going to burst. So, now, with commodities coming down, it's bursting and its over and it's time to move on. And especially with natural, or excuse me, unleaded gasoline they are saying this is another reaffirmation that the bubble is over. But we take a look at this index, what Goldman Sachs did is it took a percentage of what, or the percentage that unleaded gasoline accounted for in the index and dropped its waiting by over 5 percent. Unleaded gas used to account for 8.45 percent [...] dollar waiting wise for the index, the GSC, the Goldman Sachs Commodity index. They knocked that down to 2.3 percent. So when you do that, you're basically forcing an entire re-calibration in the markets. Because what happens is a lot of your hedge funds, you institutional money, all these different managers out there, track their funds, or their index funds, they don't even have to be index funds they could be actively managed commodity oriented funds; they'll track them to the index so that have kind of the solid baseline to mirror what's going on in the index. You'll find that a lot of stock managers will do that for example, maybe do a large cap stock fund, and they'll have maybe 70 percent of their stock fund tied into the S&P 500, mimicking it almost directly and for the remaining 30 percent, they'll do a couple of bets to try to beat the index. So, sometimes it will only be as high as you know, maybe they're only doing 5 percent or 10 percent where they're actually playing around with the, with picks that are outside of the index, they're going to try to beat the index that way. But the core of their portfolio might be the index, so they don't ever diverge too much from it. And there's a lot of reasons for that that we're not going to get into, but that's just the way things work. So when Goldman Sachs all of the sudden knocks its waiting by 75 percent [...] in unleaded gasoline your talking about a giant sell off of unleaded gasoline in the contracts that are out there. And, basically how that works is there are futures contracts that are sold for gasoline, and I don't want to get overly complicated but the long and short is that for the next couple of months these contracts have bottomed out because demand has just evaporated thanks this adjustment in the Goldman Sachs. Now, interestingly, okay, who was the former CEO of Goldman Sachs? Now if you're paying attention to it, you would know that that would be Henry Paulson, who is also coincidentally the, he is the new Treasury Secretary for George Bush, he's working for George Bush, now some people would argue, is that really not a coincidence that this should help. Because politically it's much nicer to have the gas prices drop down to a much better level. And it's not surprising that as gas prices have dropped, polls have actually shown that people are feeling much more positive with President Bush, with the Republican Party and they're indicating that, one of the big reasons is the gas prices have come down. Conspiracy or not, who knows what the you know, the thing to do is really going to be, but, will that actually happen? But it is far too coincidental for me to just ignore entirely. Now, let's get into the Dow specifically. Earlier I had mentioned that the new highs you know has really led to a media circus. And, that, I tell you what, the Dow is one of those high profile indexes as well which draws a lot of attention and a lot of people are feeling good when they hear that the Dow Jones has finally conquered the old highs of 2000 and now it's onward and upward, that's kind of what you're hearing, it's a big media circus. Now in defense of the media we're seeing a lot of questioning of why all this bad news and you know, people are still buying into it what's going on there? Again, some people on the fringe are suggesting there is some manipulation going on out there relative to the Dow index utilizing different instruments that you can to push up the Dow 30 for just you know, a couple of weeks prior to the election and make things look better. Prior to the, you know I'm not going to go there but, there are some arguments out there you can search them on the Internet as to, just do a Google on Dow manipulation or index manipulation and so forth. I know that there is the plunge protection team that anytime one of the indexes moves for than 2 percent downward, all the sudden you see these Hail Mary trades coming into the market. That's pretty much confirmed out there, that happens. But who knows what's going on with the Dow right now. But, let's just knock out this myth that we're hitting new highs. Anybody who does anything in finance knows that they have to adjust for the inflationary effects of time, the inflation effects that time, or excuse me, the effects that inflation has on your gain over time. For example if the official CPI, that's the Fed's inflation number, is running at 4 percent right now and your return is 6 percent, your real rate of return is only 2 percent, the difference between the 6 and the 4, okay? Inflation is eating away your purchasing power by 4 percent, you didn't get a 6 percent, that's your nominal return. Your real return relative to CPI is only 2 percent. So let's take a look at the Dow Jones Industrial. If were to do a relative verses nominal, or excuse me, real verses nominal return, using the Federal Reserves own CPI numbers over the past 6 years since the top in 2000, you'd need to have a Dow of about 13, 817 to equal a Dow of about 11, 750. Now, that was the close just a couple of days ago, but now we're up even above that. So, you're getting closer but where are we today, 11,800 and some, right, 850, 860? So 13, 817 is the number you need just to get that 11, 750 Dow of 2000, okay? 11, 750 Dow of 2000 translates when you adjust it for inflation to 13, 817, not even with gains. Let me repeat that one last time. The Dow's high in 2000, 11, 750 just adjusted for inflation equals 13, 817. So all this hubbub, the past couple of days off the Dow hitting 11, 754 which is its high yesterday I believe, today 11,860 or whatever it was today, the numbers yesterday for example 11, 754 is equal if we do a reverse adjustment to a Dow of 9,995 in 2000, okay? So, we're doing a reverse on there, just adjusting for inflation backwards, the equivalent of the Dow being at 9,995 in 2000. Under 10,000. So we really haven't come that far. Even though there is this media circus. Now, one of the other points that I think is important to make out there also is looking at again, reevaluating how you do real verses nominal returns. Because if you're a regular reader of Vigilant Investor, it's one of the things that we've been talking about is, we really need to recalibrate returns in an environment that is heavily inflationary. And, the topic of inflation is a separate show all to itself, but you need to consider that with what's going on with the Federal Reserve enabling the banking system, and the banking system itself is a fractional reserve type system where for every dollar deposited, 95 cents is getting loaned out, increasing the money supply and it's a multiplier effect of what's going on of deposits, you have a heavy inflationary environment from the standpoint of expanding money supply. You have to consider, begin considering that we're entering into a inflationary environment unlike the last 10, 15 years largely because you look at what's happening with energy prices, it's, I don't even want to get into it because it's a separate, you know, 45 minute discussion, separate Podcast, separate radio show altogether. Look it up on the Vigilant Investor, follow it, but we're definitely in an inflationary environment. We've been rescued by the deficit bringing back to our shores very, very, very cheap goods manufactured abroad. If we didn't have the release of the deficit, we would see much worse inflation than we are. But if we look at prices that are adjusting, they have been adjusting in commodities over the past couple of years they have been adjusting in the traditional currency which going back thousands of years, which is gold, gold's begun to really pick up. So, you know as a measurement of what's going on in the Dow, if we were to use gold from 2000 to today, and consider that as your real verses nominal comparison the Dow today is equivalent to about 5100. So, as the dollar grows weak and weaker which is something we expect the trend to be and for commodities to basically retain their value, we're not talking about going up in value, we're just simply saying they're going to hold their wealth, because you cant print copper, you can't print gold, you can't print oil like you can dollars or other currencies. The big trend over the last 15 years is all the world's central banks have been printing money left and right and injecting it into the economy. Now, when you compare currency to currency it doesn't seem all that inflationary, but that's because they're all doing it. But what we're seeing over the past couple of years is a big reaction to all that money printing and it's big, it's reflecting in commodity prices in gold prices and oil prices. Prices aren't you know, weren't at 70 dollars, and currently at 58 dollars for oil just because of what's going on in Iraq. Even before 9-11 oil was trading at 30 dollars up from 10 or 11 dollars back in the late 90's. So, there's been an adjustment going on, it's a paradigm shift if we believe, and we just can't ignore what's been happening. So, all that wrapped up, you now the Dow, is it hitting a new high? Nominal, yes it is, it's a new number definitely, but when we adjust it for inflation it has a long way to go just to break even. So, don't get caught up in the hubbub about the Dow, although from a political standpoint the average Joe flipping on his TV tonight is seeing the Dow circus going on and is going to see that probably up through election time and we're going to see, you know, good news sounding for the economy and I wouldn't get too hyped up about what's happening in equities and I'd still be fairly cautious about what's going on out there. And make sure when you're talking to your advisor or doing things on your own, you research the possibility that things with the economy; and I recommend folks take a look at our post yesterday we had on Vigilant Investor, which talks about recessions being needed, necessary, and healthy for economies to recalibrate and, with our post it's called bubbles complacency in recession. And in it we talk about just what's going on with inflation, and why inflation is bad for the economy and why the Federal Reserve policy basically is compounding some of the problems by not allowing an economy to go through hell, through a recessionary period, which is basically a point, a recession is nothing more than a chance for the economy to restore order when things get dislocated. And there certainly are a lot of things dislocated in the U.S. economy right now and we give the example of what's happened in the housing bubble, but you could also look at what happened with the dot com bubble. And you can even go back and loot at examples of what happened in the 1920's. 1920's, people don't realize it, but it was enabled by a heavy increase in the money supply. Everybody's taught about the go go 20's and all the irrational exuberance that was going on, [...] about the Florida real estate boom, all these things that happened, but very few people look at what was going on with money supply and you're not taught that much in history, you're just taught about the good times. But, people were faked out by good times. They thought the good times were real genuine growth, and really all it was, was lot of money getting injected into the economy, that didn't have any wealth backing it up, it's simply been printed out of thin air, and whatever purchasing power it had came at the expense of other dollar holders. If everybody was operating the same way they are right now with real estate, or they have been over the last 4 years with real estate and housing, they are operating as if it was real, genuine, sustainable growth. But it wasn't, it was tied to money supply. So when things started slowing down with money supply, you started having things breaking. First it was the stock market, and then it was the economy as a whole, but granted there was a lot of speculative craziness and all sorts of other problems going on in the stock market that helped compound it, but the fundamental problem was still there with money supply, causing people to go off in different directions. All the signals that are normally there to tell somebody that things are getting out of whack, get washed away when you're injecting too much money supply out there, false signals and people are under the impression that things are much, much, much better than they really are. So, forward today to 2006, how many people do you know that weren't mortgage [...] a couple of years ago that are today? I know more than a handful and same with the real estate agents, I know a lot of people who have expanded their businesses to go into those sectors, into building and all sorts of things. And anybody who supplied those trades or those particular industries, they're going to feel the effect of the unwinding, and it was all artificially created by low interest rates, artificially low interest rates and a massive injection of money supply over the past couple of years. But, I've kind of stolen the thunder from the post but go in there and read it because there's a lot more to it. And I thin that if you're operating as if this is 1982 all over again or the conventional buy and hold strategy is something you just want to do and stick with it you may want to rethink it. We're not giving advice to completely change what you're doing or to do this or that, but you definitely ought to be double checking what you're doing right now because a lot of the signals are getting washed out. And, a lot of what we're going to see is a lot more volatility because all this money supply sloshing around there causing issues. And, even in the flowing end of things like the Dow, and giving maybe false signals in the Dow a little bit as well, because people just don't know what to do with all the money that's in their hands and they're certainly not seeing economic reasons to be starting new businesses and so forth. But when asset prices are going up, maybe they're just chasing returns. Who know, but it strikes me as people going way out on a limb when there's not a lot of evidence supporting it. But all that said, again if you have any questions and you're out there listening or you're tuned in, I see that someone has suggested the instant messaging portion of the Talk Shoe live, and again if you go to talkshoe.com you can download their IM software and log in, and do IM chat and people sometimes chat among themselves, sometimes they ask questions, you can do it that way. And you can also dial in an actually ask a question if you're inclined to do so and that number is (724) 444-7444, talkcast id. is 982, and the pin number that you want to use, get a pen ready, actually you probably don't need a pen, this is a pretty easy one to remember it's 111-222-3333. That's 111-222-3333 and again our talkcast id is 982 and the dial in number on your phone is (724) 444-7444. All of this information of course is available at talkshoe.com, which is also accessible through vigilantinestor.com. But anyway, back to our question, Brian asked, "to solve the oil crisis, why not this: have the government set the artificial absolute minimum to say 85 dollars, this would drive investment to other energy sources." Definitely it would begin to do that, Brian. One of my concerns with artificially setting prices though is that it dislocates things where they wouldn't necessarily go. I would say a better thing to do rather than having the absolute minimum being set to 85 dollars is why not remove the huge subsidy that oil receives as an industry. There are plenty of good arguments that I don't need to get into that would suggest that what we're doing in Iraq, right now, what we're doing in the mid east over the last 40, 50 years is largely about oil. And when you look at the histories of some of the people who are in the current Bush administration, some of the things that they talk about, getting a pipeline from the Caspian Sea though turkey and stabilizing regions so you can control oil. Or lost money, oil is the economy and there is a lot of interventionness out there, people who believe that that government's job is basically intervene in markets and rig markets a certain way to benefit the economy. And I say benefit with a, sort of a parenthesis around the word. They believe all that manipulation is in there, but what it ends up doing is it distorts the market. So, you know oil trading right now, just under 60 dollars. Where would it trade if you didn't have the U.S. military 24-7 operating in that region. And even when we're not waging war in Iraq or doing what we've been doing over the last, you know 3, 4, years, we still have the Suez Canal, all these regions heavily, heavily monitored by U.S. warships. Now, if the, it the you know, the subsidy removed, oil would have a completely different price potentially. Or maybe not, you never know, you never know what, you know, that would do differently, I mean there's a whole lot of you know, what ifs but, you know heck, theoretically, you know, this is one of the reasons why I happen to be of the Austrian school of economics which [...] very hands off. But, you know, you end up finding that solutions end up happening much differently, when prices are allowed to reflect the reality of all the work and effort that goes into getting a particular resource or putting together a particular manufactured good and so forth. So, in the end, the real price will tell you whether it makes sense or not, and I'm a believer that the free market tends to solve a lot of problems and you know, I think that you have to balance some things with environmental issues as well. I don't think that any company out there should be you know dumping oil [...] into our oceans, ruining our fish and all that kind of stuff. So, I think that there are certain areas where, you need to have the ability to keep things in line and so that the resources that are all or ours is just by them being there. Don't get disturbed, but I'm not a big fan of the government necessarily being the one to arbitrarily set the threshold. But, I see you said, I buy, let's see if I wanted to be [...] to others such as okay, I buy that, sorry. All right, I see Brian. Now any other questions out there again, the number is (724) 444-7444, talkcast id. 982 and the Talk Shoe phone pin # is 111-222-3333 if you actually want to ask a question in person. So, moving along though, I think that you know we are in political season here. It's going to be interesting to see what happens with the economy going forward. But, we're big proponents at Vigilant Investor of looking at the fundamentals, and the fundamentals for the United States economy, for the U.S.. Government, the Federal Government, you know, a lot of local regional governments, state governments and so forth, it just bodes so poorly. A couple of weeks ago, or maybe just last week, we put up a post on our main web site, the Vigilant Investor, it talked about what was happening with the government pensions and benefits short falls there, is a new ruling out there that's going to force all government's local governments to divulge what the real pension shortfalls are. Currently right now they're keeping them all off balance sheet. And, once that gets shown, taxpayers will see what their on the hook for with all the union promises and everything that has been given out there that, you know basically are far, far, far greater than anything out there that the private sector out there ever tolerated, with the exception of the quasi, you know government private sector, which are your GM's and Ford's, and we're seeing what's happening with, you know when you have the heavily unionized environment where these deals were made, those companies are essentially going bankrupt you know, right in front of our eyes. Which is again another reason why, you know how do people get so excited about the Dow Jones Industrial when Ford and GM are functionally you know, just on the edge of depressive this year, they're basically throwing you know anything they can off the back of the boat to keep the thing afloat. I mean it's just, there just jettisoning all extra weight at the moment to keep things righted. And you know, they're keeping a very stiff chin. But, I mean come on, I mean, you know, the ratings agencies, your Moonies your S&P all have a history of overstating, sometimes the ratings companies are on the edge, and even right now they're giving them their lowest [...] near lowest and it, you know, investment or below investment rate bond ratings, junk bond ratings. So, when that's going on, things can't be all that well, you know, those are the major, it used to be said, how GM, the whole economy goes. And, now I've argued that GM is a great bellwether for the U.S as a whole, where we look at all the promises, all the expectations the sun was shining and everybody thought that would continue forever and things got very bloated. I think there's a lot of that going on in the U.S. today, and that's why we're seeing so many jobs leaving and I, what I mean by bloated or maybe a better word in inefficient, but there's just too much of a heavy regulation hanging around the neck of the U.S. economy and that is why so many jobs are going to, I mean heck, Red Communist China for heaven's sakes. And, you know when that's happening clearly something is wrong and you know when you have to hire, you know, spend 5 thousand dollars just to do small start up work, or legal work here, legal work there, just to navigate the unnecessary mine field. And though, mind you, I'm talking about something that my own business does that I'd love to see you know, not being necessary but something along the lines of you know what they call pension administration qualified plan administration, and ends up being a burden for any company that wants to set up a retirement plan for their employees. And something as simple as that gets so complicated, you've got to hire extra people out there and just to help you deal with it because it's a complex testing the tax rules, all the you know, regulations, it's just hyper crazy and that gets changed every couple of years and I'm the biggest critic, I mean my own industry lobbies for this kind of stuff to be expanded and changed to remain, because it's you know we're talking hundred million dollar industries where a lot of livelihoods are being make by attorneys and CPA's and compliance analysts and administrative analysts, you know all these people that charge consulting fees, tens of thousands of dollars to do this. What good does that do for the economy, it's the big heavy arbitrary hyper complicated, you know. I mean look, tax codes, if you wanted to collect money you're going to say let's you know, let's knock it down to 10 pages and be done with it. Instead, it's you know you stack the tax code end to end something like, what 15 feet thick? I mean come on, that's just crazy and we're wasting people's time, money, resources and that's just, you know one of many little things that are compounded. But look, we've gone on for 45 minutes with today's show and I think that we've covered a lot of ground and I would just be cautious out there with the economy, don't think we're out of the woods yet, even though we're seeing good numbers, coming around on the superficial level. Don't forget that even when we hear about CPI and GDP and so forth that those numbers are often rigged and tune in next week because we're going to have on our show, John Williams of Shadow Stats. Shadow Government Stats., shadowstats.com. He an econometrics consultant who has for years advised the Fortune 500 companies, Fortune 1000 companies, help them build their models and so forth. And at one point years ago he found that his models weren't working as effectively as they used to be and he's discovered that what the cause was, that the government, the official government numbers that were getting released had been changed in terms of how they were calculated. And in the end, he had to go and tweak them to get his models to work again. And once he got the models tweaked, he was able to improve his numbers and get his clients back on track. But, the long and short is that CPI, GDP, unemployment, all these numbers that everybody gathers round the TV sets and monitors during the day to determine how they're going to trade and what they're going to do in the market and so forth, and what the economy is doing [...] are largely fudged and badly so. It helps the U.S. government balance budgets if you under for example, hey, Social Security, you underestimate it, underestimate CPI, it's easier to balance it without have to run it by the electorate. All you go to do is fudge the factor for how you gage the growth, and what you're obligated to pay. Anyway, we'll be talking with John Williams next week, 9 o'clock, Wednesday, Eastern Time and you can hear the interview. And, if you want to tune in live, we'll see if we can get some questions to him as well. I invite everybody to visit his web site shadowstats.com to get a feel, he has some great graphs on there showing official GDP, official CPI and then he does a couple of recalculations of those numbers to try to restore some order to them and, you can take a look at those. And I'll tell you what, just as a teaser, if real inflation is actually at 10 percent verses the official 4 percent or 3.5 percent that it is right now, oh boy, you had better hope that your CD really starts getting a lot better return pretty soon if you're planning on retiring and investing in CDs. It's not a good environment to be in when, you know real inflation is running that high, and hey, "real inflation that high, what do you mean," you say. Look at what health care costs are, look at what's happening to college costs, look at what's happening with housing prices. Inflation is out there. Food prices have gone up, portion sizes have gone down and packaging and so forth. But, I could ramble on and I don't want to steal the thunder of John next week, so tune on in. In coming weeks as well we're going to have a few other people on, we're going to be finalizing some dates, we're going to have J. Edward Griffin on who has authored The Creature From Jekyll Island, a phenomenal book that exposes not just the Federal Reserve, but the entire international banking system as quite a cartel. But it's hard to refute, because there it is, we've talked about it a lot of vigilantinvestor.com and we're big fans of Murray Rothbard, but probably the most comprehensive book on how the banking system functions is The Creature from Jekyll Island. We'll have its author on, one of these weeks coming up fairly soon and tune into our web site to get a feel for when that's going to be. But in the meantime, everybody take care. Thanks for tuning in, every Wednesday night at 9PM. This is Johannes Ernharth for the Vigilant Investor, take Care.

Discuss It!

rushessay said:

The economic situation all over the world is dancing due to some unwanted incidents in the market place.There are various reasons why the economic conditions is not stable in the today's market trend.The investors should be aware of the future business strategies in order to get some good result.

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