The Core
Why We Are Here => Economics & Investing => Topic started by: dogboy on September 13, 2012, 05:13:44 PM
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WASHINGTON (MarketWatch) — The Federal Reserve, worried that improvement in the unemployment rate has stalled, announced a third large purchase of bonds on Thursday in an effort to bring down long-term interest rates and spur growth.
The Fed said it would buy mortgage-backed securities at a pace of $40 billion per month.
The Federal Open Market Committee, which ended a two-day meeting on Thursday, said it was concerned that, without the action, “economic growth might not be strong enough to generate sustained improvement in labor market conditions.”
In addition to bond purchases, the Fed said it intends to keep the benchmark short-term interest rate, the federal funds rate, at nearly zero until mid-2015. The prior guidance on the first rate increase had been late 2014.
The guidance now extends well beyond the term of Fed Chief Ben Bernanke, which ends early in 2014.
Stocks DJIA +0.76% spiked but then lost about half their gains after the Fed statement was released. The U.S. dollar turned up and 10-year Treasury prices turned down. Read Market Snapshot.
The Fed has left the federal funds rate at nearly zero since December 2008.
The committee’s vote was 11-1. Jeffrey Lacker, the president of the Federal Reserve Bank of Richmond, dissented, as he has at every meeting this year.
The Fed took the aggressive action out of a growing concern for the economic outlook, especially the anemic labor market.
The Fed said it would continue to monitor incoming information.
“If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability,” the FOMC said.
Despite holding interest rates at zero for more than three-and-a-half years, and the central bank buying $2.3 trillion in assets, the unemployment rate has been stuck above 8% since early 2009. There are 12.5 million unemployed workers.
Economists and even Fed officials disagree on whether further asset purchases will have any lasting effect on the economy.
The Fed hawks are worried that core consumer price inflation is running at a 2.1% rate over the past 12 months despite the weak economy.
Economists expect sluggish growth for the last six months of the year. Headwinds from the European sovereign debt and banking crises are holding the economy back.
There is also mounting concern over a stalemate over U.S. fiscal policy.
http://www.marketwatch.com/story/fed-to-launch-qe3-by-buying-mortgage-securities-2012-09-13?link=MW_pulse
...the train wreck just grinds ahead.
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Economists and even Fed officials disagree on whether further asset purchases will have any lasting effect on the economy.
Pop quiz - any evidence of QE by any country, over the past few years, having any significant positive effect?
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I actually think the U.S. is a great example. I think the long term consequences are catastrophic, but I think if you wear blinders you would see a financial crisis that was avoided temporarily, at the expense of our overall future financial health.
Here is Ron Paul's read on it:
http://www.bloomberg.com/video/ron-paul-reacts-to-more-federal-liquidity-YrhUOuW~SJqrGGpwvqm52A.html
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I obviously have a few threads in here and in the private forum on this, so I have been convinced for some time that what I saw was actually real, and not just concocted by my short attention span and vivid imagination. And the gold and silver prices support this.
In fact, up until 1 year ago, I used to hear 2 sides of the story, now I only hear one. There are people like me that are pissed off and scared about what's going on, and there are the masses that don't have a clue about what I'm talking about and how any this will affect them. But this time there is no valid counter argument, like there usually is.
Usually people polarize into 2 opposing groups and you have groups that argue their points, and pull in experts and scientists and economists.... and then the other side comes in with theirs. Not this time. There is no fighting. I don't hear anything on Facebook, like I do about the elections. The Republicans and Democrats aren't mentioning it. Mainstream news downplayed it and almost relegated it to a side story in favor of the embassy attacks.
The U.S.D. was betrayed by it's own government, and the US Citizens are so fat, dumb, and happy, they have no idea what's going on and they feel secure enough that they don't feel they have to pay attention. And it's right there in front of everyone to see, plain as day. It just happens slow enough that people don't step back and question the big picture.
(http://www.fgmr.com/images/Images%20Articles/Decline%20in%20Dollar%20Purchasing%20Power%2023%20Oct%2009.GIF)
October 25, 2009
For example, the price of crude oil has climbed from $25.76 on January 3, 2000 to $80.50 this past Friday, an obvious decline in the dollar’s purchasing power. During this same period gold has risen from $288.50 to $1055.60. In other words, an ounce of gold today buys approximately the same amount of crude oil it did at the beginning of this decade, while the dollar buys much less.
1) The blue line shows how much less foreign currency the dollar can buy now. The currency basket is the US Dollar Index, and the dollar buys only 75 units compared to 100 at the start of the decade.
2) The red line is the key. The dollar could purchase 100 units of gold at the start of the decade, but today only purchases 27, a 73% decline in the dollar’s purchasing power.
3) The black line shows the dollar’s purchasing power in terms of crude oil, which trends pretty much in the same direction as gold, but obviously with considerable volatility. Compared to 100 units at the start of the decade, the dollar now purchases only 32, though this is an improvement from the only 18 units the dollar purchased during the spike in crude oil prices in mid-2008.
Thus, when we say the price of gold is rising, we are grabbing the wrong end of the stick, which contributes greatly to today’s misunderstanding of gold. To be correct, we should be saying that the purchasing power of the dollar is falling. And when it is compared to gold, it is clear that the purchasing power of the dollar is falling a lot.
(http://www.small-business-goldmine.com/images/Dollar-Decline-Chart.jpg)
...see what I'm saying? It is not arguable. These graphs don't just show numbers; they show 'denial'. The middle class is going to be wiped out. All this money is being given to Wall Street under the pretense it will open up lending. It won't. It will go to salaries and more, higher risk speculation.
In my eyes, the Fed and the ECB announcing 'unlimited printing' is a shotgun start to what will be the beginning of the end of the financial system, and life as many of us know it. Everybody you know that saved their whole life to retire, is done for. They have no where to invest their money that will give them any returns, and real inflation is eating their nest egg at an ever increasing rate. Meanwhile, everyone eles is encouraged to go into debt, under the pretense this is a good thing, with low interest rates. Nice.
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"You are screwed."
-Peter Schiff
http://youtu.be/LS879r7xeLc
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Has anything like this happened in that past?
I mean is this new territory with regards to what's happening and who it with? i.e. a global power
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Literally, every single fiat currency in the history of man has ended this exact same way - hyperinflation. That is a fact. But never in the history of man has man been able to extend and intensify the collapse that is coming they way that they have this time. America has the highest incarceration rate of the world and growing, the government is over its head in debt, the people are over their head in debt, the workforce is aging and shrinking, we are at war all over the world... and they are trying to solve the problem of lack of growth by printing more money and going into more debt.
Think of it this way: This whole thing only works if the public believes the dollar isn't losing any value. So the trick is to make every one think things are just getting more expensive. Which is really an impressive feat, knowing that since everything is mass produced and technology has grown exponentially, you would think everything should be getting cheaper, right? So to convince everyone otherwise really is impressive.
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The following are 10 shocking quotes about what QE3 is going to do to America....
#1 "People like me will benefit from this." -Donald Trump
#2 "I want to be clear — While I think we can make a meaningful and significant contribution to reducing this problem, we can’t solve it. We don’t have tools that are strong enough to solve the unemployment problem"-Federal Reserve Chairman Ben Bernanke
#3 "This is the nuclear option for them. This is a neverending weapon that is being fired at the middle class" -Michael Pento, The Founder Of Pento Portfolio Strategies
#4 "It means we are weakening the dollar. We are trying to liquidate our debt through inflation. The consequence of what the Fed is doing is a lot more than just CPI. It has to do with malinvestment and people doing the wrong things at the wrong time. Believe me, there is plenty of that. The one thing that Bernanke has not achieved and it frustrates him, I can tell—is he gets no economic growth. He doesn’t do anything with the unemployment numbers. I think the country should have panicked over what the Fed is saying that we have lost control and the only thing we have left is massively creating new money out of thin air, which has not worked before, and is not going to work this time." -Ron Paul
#5 "Quantitative easing—a fancy term for the Federal Reserve buying securities from predefined financial institutions, such as their investments in federal debt or mortgages—is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy. It is a primary driver of income inequality formed by crony capitalism. And it is hurting prospects for economic growth down the road by promoting malinvestments in the economy." -Economist Anthony Randazzo
#6 "That’s absolutely nonsense. The Fed is just propping up the banks." -John Williams Of Shadowstats.com
#7 "I happen to believe that eventually we will have a systemic crisis and everything will collapse. But the question is really between here and then. Will everything collapse with Dow Jones 20,000 or 50,000 or 10 million? Mr. Bernanke is a money printer and, believe me, if Mr. Romney wins the election the next Fed chairman will also be a money printer. And so it will go on. The Europeans will print money. The Chinese will print money. Everybody will print money and the purchasing power of paper money will go down." -Marc Faber
#8 "I think this will end up being a trillion-dollar commitment by the Fed" -Mesirow Financial Chief Economist Diane Swonk
#9 "This is a disastrous monetary policy; it’s kamikaze monetary policy" -Peter Schiff, CEO Of Euro Pacific Capital
#10 "[T]he FED’s QE3 will stoke the stock market and commodity prices, but in our opinion will hurt the US economy and, by extension, credit quality. Issuing additional currency and depressing interest rates via the purchasing of MBS does little to raise the real GDP of the US, but does reduce the value of the dollar (because of the increase in money supply), and in turn increase the cost of commodities (see the recent rise in the prices of energy, gold, and other commodities). The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers thereby reducing consumer purchasing power. Hence, in our opinion QE3 will be detrimental to credit quality for the US…." -Credit Rating Agency Egan-Jones
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From the article:
"We have reached a major turning point in the financial history of the United States.
"It would be hard to overstate how much damage that QE3 could potentially do to our financial system. If the rest of the world decides at some point that they no longer have confidence in our dollars and our debt then we are finished.
"Sadly, the mainstream media does not seem to understand this, and most Americans gleefully believe whatever the mainstream media tells them." -By Michael
http://endoftheamericandream.com/archives/10-shocking-quotes-about-what-qe3-is-going-to-do-to-america
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"sit on your hands" is the advice most guys are giving these days... I think this touches on what we were talking about the other day - short term trading advice vs longterm. You seemed to think you are are getting opposite advice, when I don't think you are. Every major country in the world - USA, EU, China, Japan, etc. - have announced money printing... metals, commodities, and other real assets will appear to rise against the dollar as an inevitable consequence...
Short Term:
We were watching metals go up and down for months, forming a ('pennant' or) long triangle, with the most acute angle on the right.... at the end of one of these, prices almost always break up or down, violently. Due to manipulation, instead of breaking up, JP Morgan held it down, making it go through another cycle or two, creating even more buying opportunities than most people expected - Soros jumped in what now appears to be 'early' early, then others did, later. Finally, it broke. Now metals look like they are going to go sideways and then go up... or just go up. Short term traders are selling and taking profits, long term bulls are holding and extremely conservative people are buying, because they were waiting for a confirmation signal that we already hit bottom and were on the way back up - and with the recent price explosion, they got that.
The Conservative LONG TERM Option = Preserve wealth
Abandon: S&P500, bonds, holding too much cash in banks, things that people only want to buy when times are good, lending $ on fixed terms.
Buy: metals, as much hard goods and consumables as you can store, because the prices could possibly be 20% or more next year by this time.
Diversify: When it comes to survival, literally or figuratively, your chances of success go up if your resources are divided in a purposely redundant manner. That means holding more than one currency in one country, holding more than one kind of metal in more than one location, having *some* money in the stock market in certain stocks, real estate (commercial, residential, retreat).
Borrow: interest rates are dirt low, if you have access to 'cheap money' purchasing real-estate at fixed low long term rates and then renting it out.
Speculate: While most of the world loses money, others who position themselves correctly will profit wildly. While the bulk of your total wealth should be invested with preserving as much wealth as possible in mind, there should be a portion that should be used to attempt to profit from the situation, even if it is a relatively small percentage. In other words, I'm not saying to invest across the board in risky things, but rather allocate some higher risk, higher reward investments to offset possible losses from being overly conservative with the rest of the investment.
- dogboy
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The threat of hyperinflation in our current economic state is very minimal, though it is true that the U.S. is currently at the highest risk for such a phenomenon among major developed countries. Preparations for a hyperinflationary environment have heated up among some investors in recent years, as the consistent money printing from the Fed has many worried that inflation will spike at some point in the near future. For those who fear a major jump in inflation, we outline an all ETF portfolio to protect yourself from the havoc that inflation can wreak on your holdings.
Portfolio Snapshot
First things first, here are the ETFs that we have chosen for this particular portfolio.
Ticker ETF Asset Type Allocation Expense Ratio
IEZ iShares Dow Jones U.S. Oil Equipment & Services Index Fund Domestic Equities 10.0% 0.48%
MOO Market Vectors Agribusiness ETF Domestic Equities 10.0% 0.59%
GDX Market Vectors TR Gold Miners ETF Domestic Equities 10.0% 0.55%
HAP Market Vectors Hard Assets Producers ETF Domestic Equities 10.0% 0.65%
TBF ProShares Short 20+ Year Treasury Inverse Fixed Income10.0% 0.95%
TIP iShares TIPS Bond Fund Fixed Income 10.0% 0.20%
GLD SPDR Gold Trust Commodities 20.0% 0.40%
DBC PowerShares DB Commodity Index Commodities 20.0% 0.83%
Weighted Average Expense Ratio 0.59%
As can be seen above, there are really only two funds that are unrelated to the commodity industry. This is because commodities have been historically strong assets for fighting inflation, leading us to choose two direct commodity products, as well as four others that invest in commodity producers.
Holdings Overview
Below is a brief overview of each component of this portfolio.
IEZ: This ETF invests in companies that are suppliers of equipment or services to oil fields and offshore oil platforms, such as drilling, exploration, engineering, logistics, and platform construction. IEZ has more than 40 individual holdings, including companies like Schlumberger and Halliburton. Companies engaged in activities related to oil drilling often see increases in demand for their services during periods of high inflation.
MOO: This ETF invests in companies that generate the majority of their revenues from the business of agriculture, including agricultural chemicals, operations, equipment, and livestock. The legendary Jim Rogers recently advised investors to “sell your houses, move to Saskatchewan, buy a tractor and some farmland, and start farming,” as he anticipates an “inflation holocaust” sending agriculture prices skyrocketing.
GDX: This ETF invests in companies engaged in mining for gold, and has significant holdings in Canada, South Africa, the U.S., Australia, the UK, and Peru. Since gold generally performs very well in inflationary environments, companies engaged in its discovery tend to see increases in revenue as well [see also Three Reasons Why Gold Is Overvalued].
HAP: This ETF tracks an index developed in conjunction with famed commodity investor Jim Rogers, and invests in companies engaged in the production and distribution of hard assets and related products and services. HAP’s holdings include companies engaged in the energy, agriculture, precious metals, and industrial metals industries. This ETF has investments in more than 40 countries, with the most significant being the U.S., Canada, and the UK.
TBF: This ETF offers inverse exposure to the Barclays Capital 20+ Year U.S. Treasury Index. Since Treasuries tend to lose value in hyperinflationary environments, this ETF provides an opportunity to profit from drops in value. It is noted that TBF uses complex financial instruments to achieve inverse exposure. As a result, compounding of returns may lead to erosion of returns over extended periods of time. To avoid this, investors should develop and implement a rebalancing plan.
TIP: This ETF invests in Treasury Inflation-Protected Securities (TIPS). These securities provide protection against inflation because the principal of a TIPS rises with inflation, as measured by the Consumer Price Index (CPI). Unlike most traditional fixed income investments, TIP offers a guaranteed real return that will not be eroded in a high inflation environment.
GLD: This ETF invests in and physically stores gold bullion. Gold has historically been a very strong inflation hedge, appreciating in value as investors seek refuge from other depreciating currencies. Unlike equities or bonds, gold has no potential for dividend or interest payments, so any returns will be generated through increases in the market price level of the metal [see also Why No Investor Should Own GLD].
DYY: This ETN offers leveraged exposure to a basket of futures contracts, including wheat, corn, light sweet crude oil, heating oil, gold, and aluminum. In hyperinflationary environments, prices for these commodities can be expected to rise, pushing up the value of this product.
Historical Return Analysis
Ticker 2008 2009 2010 2011
IEZ -58.7% -63.6% 31.8% -7.6%
MOO -50.9% 58.7% 23.0% -11.4%
GDX -26.1% 36.7% 33.9% -16.1%
HAP n/a 42.5% 16.5% -11.7%
TIP -0.5% 9.0% 6.1% -29.6%
TBF n/a n/a -12.4% 13.3%
GLD 5.0% 24.0% 29.3% 9.6%
DBC -31.7% 16.2% 11.9% -2.6%
Portfolio n/a n/a 18.1% -4.9%
Compare to SPY -36.7% 26.3% 15.0% 1.8%
Compare to AGG 7.6% 3.3% 6.4% 7.7%
The adjacent table provides historical results for each component of this portfolio, as well as backtested results (as available) for the entire portfolio during 2008, 2009, 2010, and 2011. The table also shows how this portfolio performed relative to a popular stock market benchmark (SPY) and bond benchmark (AGG).
Not surprisingly, the components of this portfolio struggled in 2008 amidst a broad market recession. In 2009 and 2010, the equity holdings in this portfolio reclaimed much of the ground lost during 2008. The dismal equity returns in 2008 highlight the importance of maintaining an allocation to fixed income ETFs in this portfolio.
The recent economic downturn also had a significant impact on commodity prices, as evidenced by the loss of DBC over the most recent year. TIP has remained relatively stable during the recent market turmoil, as has GLD, which is the top performer during the last three years.
Portfolio Expenses
Although this portfolio is not intended to be held over an extended period of time, we made an effort to minimize costs in selecting the individual components. Since many ETFs in this portfolio are not “plain vanilla” funds, they maintain expense ratios higher than some exchange-traded products. But while the weighted-average expense ratio falls on the higher side of ETF investing, it remains well below fees charged by traditional actively-managed mutual funds (which can exceed 1.0%). The impact of this reduced cost structure over a two-year time horizon is significant [see also The Ten Commandments of Commodity Investing]:
Growth of $1 Million Over 2 Years @ Annual Return Of
Portfolio Expense Ratio 5% 10% 15%
Black Swan Hyperinflation Portfolio 0.59% $1,090,187 $1,197,099 $1,309,011
Actively-Managed Mutual Fund Portfolio 1.00% $1,081,600 $1,188,100 $1,299,600
While this can certainly be used as an all encompassing group of holdings, those wishing to protect themselves from inflation can also use this model portfolio as a smaller part of their overall group of holdings. It should also be noted that this portfolio is useful in any kind of inflationary environment not just hyperinflation.
*Post courtesy of Jared Cummans at Commodity HQ.
http://commodityhq.com/2012/how-to-build-a-black-swan-hyperinflation-portfolio/
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(http://img266.imageshack.us/img266/8807/silverr.jpg)
Gold and silver have just gone vertical as the Chicago Fed President Charles Evans has just appeared on CNBC calling for QE∞ squared!
Silver has exploded nearly $1.50 to $35.50, and gold has jumped nearly $20 to a new 2012 high of $1793!!
And this thing isn't even getting started yet.
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video: http://plus.cnbc.com/rssvideosearch/action/player/id/3000118604/code/cnbcplayershare
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That graph is a textbook example of "How to Lie with Statistics". Note how the baseline is set way above zero, and be aware how that can make small ups and downs look a lot bigger than they really are.
Yes, there's an uptick, but to keep things in proportion, re-imagine how that same graph would look if the baseline were zero.
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True, but don't let your fear of financial graphs without baselines where you want them to be, shadow that a $1.50 spike in silver, and $20 spike in gold, is significant, given the sheer amount of contracts needed to exchange hands to make something like that happen in just minutes.
The prices are coming back down, but to see movement like that in a single day? That's extremely volatile in my book, and we can pretty much definitely link this price change directly to the head of the Fed just TALKING about QE and the market's reaction to it.
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http://www.amazon.com/How-Lie-Statistics-Darrell-Huff/dp/0393310728/
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I took 3 years of statistics while I was at Boston University and maintained an A-, so forgive me if I'm not interested in reading any more textbooks... especially when it would be so much more pleasing to have you go back through the daily financial charts to show me the last time you saw a $1.50 spike in silver, or $20 spike due to trading activity in a 10 minute span of time.
But I wont be so cruel - the answer is the day they announced QE3. How utterly unremarkable.
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Yes, it's utterly unremarkable that people follow the herd.
Silver has been higher before, and it's certain to go higher again. The people who will make the most money when it does will be those who make their investment decisions before the herd arrives.
Side comment: if you took three years of statistics and never came across "How to Lie with Statistics" then my respect for Boston University would drop a few notches.
That book is a valuable tool for sifting through the rampant innumeracy which is such a problem in public discourse these days.
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First, allow me to apologize. I didn't know we were talking about the great Darrell Huff - the Albert Einstein of modern day statistics.
Second, I deeply regret that kitco publishing their 3 day chart, in a manner common in the industry, offends your lack of decency. I think you should write them.
Before you do, however, make sure to use the live version, as a reference to the claim they are lying to the entire industry that uses their charts:
http://www.kitco.com/charts/livesilver.html
...that should help you pin down the offending material. If that isn't enough you can do a search for other sites that are republishing these financial charts starting with these 16000:
http://www.google.com/search?q=%22www.kitco.com%2Fimages%2Flive%2Fsilver.gif%22&oq=%22www.kitco.com%2Fimages%2Flive%2Fsilver.gif%22&sugexp=chrome,mod=9&sourceid=chrome&ie=UTF-8
Third, if you get done with step 2 - whatever you do - DO NOT CLICK ON THE GRAPH. I can't even imagine what you would think of a graph like that, with all of it's little sliders all over it, allowing you to compare two points over time, etc.
....or forth, maybe you can show me what page of the book, the illustrious Darrell Huff explains the last time he saw a $1.50 spike up in silver, or $20 spike in gold, due to trading activity in a 10 minute span of time. On any chart. Or any table. Anywhere.
Statistics don't lie. Statisticians lie.
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An oldie, but a goodie...
(http://www.fundmasteryblog.net/images/minyanville--commod-treas-rw481.jpg)
How about this one:
http://socioecohistory.files.wordpress.com/2011/01/correlation_between_qe_n_snp500.jpg
Another lie from last year:
(http://static.seekingalpha.com/uploads/2011/4/12/saupload_calculatedrisk__qe_sp.jpg)
More lies...
(http://www.investinmetal.co.uk/blog/wp-content/uploads/2012/09/Gold_and_QE.jpg)
...so let me ask you, am I lying?
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offends your lack of decency
Huh?
I stand by my point: a graph whose baseline is something other than zero can give a very different impression about the proportions of something than the same info presented in a graph that starts at zero.
That's something that consumers of information are wise to keep in mind.
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>I stand by my point: a graph whose baseline is something other than zero can give a very different impression about the proportions of something than the same info presented in a graph that starts at zero.
I think the operative word is 'can'. In this case it didn't. So the tip is a good one it just doesn't apply in this case.
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>>The people who will make the most money when it does will be those who make their investment decisions before the herd arrives.
What's that old expression, if you see the bandwagon you're too late, or something like that. You definitely need to be in whatever it is before the followers arrive.