PAPER TIGER? PAPER CITY?

GHOST CITIES
Please take a few minutes to watch this 60 Minutes video on China's ghost cities.  I've written about this several times, but given the recent new action by the Chinese government to curb real estate inflation, it seems as though the may be new movement in possible deterioration of their most-loved asset market.  The Communist government announced new taxes that require sellers to pay 20% capital gains taxes and also mandated that purchases of second homes must be paid for with 60% cash down payments.

WHAT ELSE CAN THEY DO?
Given the investing approach and lack of alternatives, who knows if this will be the final straw that blows them up?  As we know, central planning and central banking and a zero interest rate world creates all sorts of mal-investments and mis-allocation of investments to compensate for distortions in yield and risk.

Enjoy;



Thanks for reading.  I've been slammed with lots of projects, please check back frequently as I am trying to post more.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments athttp://www.goatmug.blogspot.com/

THE 3 PILLARS OF THE FED MANDATE

I almost fell out of my chair today at lunch as I scanned Bloomberg's news stories.  There in not-so-black -and-white stood the statement that completely summarized all of the issues that America has with Wall Street and its crazy view of the world.  There, plainly for all to see, one statement characterizes why the last two years of my blogging has been therapy in a way.  This sentence captures the essence of why Main Street will never get Wall Street, and why Wall Street won't be happy until the entire nation's financial system is completely destroyed.

WE NEED MORE POWER!
In an interview this morning with Bloomberg Surveillance, Tom Keene spoke with Ira Jersey of Credit Suisse Group.  In the discussion, Ira gives us his view that more quantitative easing is needed and more liquidity should be spent to stimulate the economy.  Mr. Jersey starts with;

"The policy-making Federal Open Market Committee meets Jan. 24-25. The central bank is forecast to keep its target for the federal funds rate at zero to 0.25 percent. The target has been at that level since December 2008 and the Fed has pledge to keep it there until mid-2013. 

The central bank has purchased $2.3 trillion of mortgage and government bonds in two rounds of so-called QE. In September, it announced plans to sell $400 billion of short-term debt and use the proceeds to buy an equal amount of longer- maturity securities, in a program as nicknamed Operation Twist after a similar action in 1961 designed to contain borrowing costs for companies and consumers."

“We do think the Fed is going to do another round of asset purchases later in the quarter, probably aiming for April,” Jersey, director of U.S. rates strategy at Credit Suisse" 

ALL IS FIXED, LEAVE IT ALONE?
Ok, so we are told daily on CNBC that jobs are getting better,  housing is improving, banking is returning to normal and banks are healthier, inflation is under control,  foreclosures are abating, and the consumer is out there spending and adding to his revolving debt.  How could we possibly need more QE?

Well, if you are a Main Streeter, perhaps all of those positive things would lead you to conclude that while the economy is not fully recovered, it is on its way and the government and Fed should wait and see how things are going and maintain the status quo for a while.  You'd probably think that allowing market forces to take over might be a good thing.  While you might feel that way, bankers don't exactly see it the way you do.

"Jersey said a third stimulus effort may be more focused toward the housing market and buying mortgage-backed securities. 

A Bloomberg news survey conducted in November found 16 of the 21 primary dealers of U.S. government securities said Fed Chairman Ben Bernanke and his fellow policy makers would start another purchasing program during the first half of 2012. The dealers’ estimated that the Fed may buy about $545 billion in home-loan debt. 

“We need to get confidence up, in particular business confidence up,” Jersey said. “That would help stimulate jobs, which helps stimulate the residential housing market, and that’s what gets you out of the doldrums.”  

HOUSING, HOUSING, HOUSING IS NOT OK
So, we need to get the business confidence up and that will fix housing and everything else.  Why the heck didn't I think of that? Have you noticed that everything comes back to these housing values?  If I didn't know any better, I'd almost suspect that banker's balance sheets could somehow still be impaired after all this time.  Mr. Jersey believe that the Fed will act to drive mortgage rates even lower and somehow this will get economic activity really fired up.

WHERE IS HE GOING WITH ALL OF THIS AND HOW DOES IT RELATE TO THE FED?

Mr. Jersey casually drops this bomb on us, which is frankly just awe-inspiring.

“We are growing, we just don’t feel prosperous. It is a part of the job of the Fed to assure prosperity, one of the ways to do that is to kick- start housing.”

WHAT??  THE 3RD LEG OF THE FED STOOL
Did Ira Jersey just say what I thought he said?  Of course he did.  Didn't you know that there was a 3rd mandate of the Fed?

First, we want to maximize employment, second, we want to maintain price stability and NOW, Credit Suisse has added that we need to expect the Fed to make us feel prosperous!! It is so nice to know after all of my years in the markets that I had completely left one of the Fed's mandates out!

Clearly this interview reveals the divide between Wall Street bankers and normal people.  We want the Fed to just stop, and the bankers just want the Fed to make them happy.  Unfortunately we also know that the only thing that makes bankers happy is a predatory economic attack on our wealth and our savings (sort of like the government too eh?).  Somehow I think regular people don't have a chance in this fight.

Finally, if you want to read some old speeches about the Fed mandate, how about this gem from another Fed Governor who helped do "research" that helped collapse a Euro nation a couple of years ago. - MONETARY POLICY & THE DUAL MANDATE - Fred Mishkin

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

ECONOMY ROLLING OVER OR SLOWING DOWN? JULY MACRO UPDATE

The July report is full of great data but as usual we find that the information leads us to mixed conclusions.  I've added an additional indicator this month that may be helpful in providing us a clue about the economy's direction over the next quarter or two.   The last eight to nine weeks as an investor have been anything but easy.  We've seen a mild correction in markets that lasted almost two months suddenly turn into a blistering buying rampage that resulted in the markets pushing to new highs within 7 or 8 days.  We've seen Europe appear to be in collapse mode only to be rescued from the jaws of death.  We've seen US markets erupt in optimism and rally expectantly into the coming earnings season.  It is so important for us as investors to note that the economy is not the market and sometimes it is better to stop being right and simply but a saddle on the beast and ride it.  Have I thrown in the towel and dropped the notion that the economy and markets will retest their 2009 lows?  Unfortunately the answer is no.  But just like I posted in August 2009, there is a time to simply ride the wave like an agile surfer less we face the awesome power of the ocean's fury and get beat to death.  Ultimately this may mean that you trade small and look for significant points of support and resistance to enter trades to reduce risk and maximize gains.  Please enjoy and don't forget to leave your questions and comments, I really enjoy them.

RAILS - http://railfax.transmatch.com/
Rail traffic continues to trend higher against the 2010 postings.  The week showed gains in every group except coal and autos.  Grain shipments were significantly higher.

BNSF
Regular readers know that I often look at individual rail shipping tonnage in an attempt to spot trend changes or relative under or out performance.  I wanted to highlight BNSF because it is showing signs of weakness here and beginning to trend below last year's number.  Unfortunately Warren Buffett bought this target last year and added to Berkshire Hathaway's conglomerate of holdings so we can't add this railway to our watch list of potential shorts, but heck since BRKA is doing so poorly perhaps we should add it too our lists anyway.  The decline in production here in BNSF isn't going to fix problems there.  CP and CSX look weak too, but not as potentially bad as BNSF.  BRKA is posting a negative 3.1% return so far year to date as of 7/7/2011.  YUCK!

CRUSHED STONE
The movement of crushed stone often gives us insight into commercial real estate construction.  Crushed stone tonnage is tracking right on par with 2010's levels so I'm not expecting an overwhelming surge in commercial real estate building numbers.  We'll look at transaction pricing for CRE later, I'd personally expect to see a ramp up in those prices on existing buildings and then expect to see a follow on as investors and developers take confidence in higher prices.  Clearly we aren't seeing any of that. 

CHEMICALS
The transportation of chemicals is great to examine as we look at manufacturing in the US and the world.  Chemical usage is a barometer of the health of the general economy.  So far, the relative position of the amount of chemicals transported is a parallel shift higher than 2010 so things continue to look positive.  Over the next couple of weeks we'll need to watch closely to ensure that volumes turn up to keep pace with last year's recovery trend.

MOODY'S / MIT TRANSACTION BASED INDEX - COMMERCIAL REAL ESTATE - http://web.mit.edu/cre/research/credl/rca.html
The April numbers were recently released for the Moody's/MIT Transaction Based Index.  This index includes actual commercial real estate transactions for the period.  Unfortunately we continue to see that commercial real estate prices in total are falling still.  April deal prices notched a 3.69% decline for the month.
 

COSTAR - COMMERCIAL REAL ESTATE - http://www.costar.com/about/article.aspx?id=9979
Just as the MIT data suggests, Costar also reports that commercial real estate continues to fall.  While the information is dismal, there are some areas of the nation that are actually showing improvements in transaction price in past months.

I wanted to highlight some key points for April CoStar data.

Sales volume is rising.  Perhaps sellers are finally going to puke out their bad investments from the 2005 to 2007 period where they simply overpaid.

In April, 793 transactions were on properties that were "repeat" sales, meaning that this is a great source of data for them to examine real pricing trends.  We not only can see price, but can also see when the seller acquired the asset (or liability in this case!).  CoStar’s Composite Commercial Repeat Sales Index declined by 1.7% in April 2011.  It is now 13% below the same period last year and 38% below its peak in August 2007.

Here is the staggering part!
In April 2011, over 77% -- or more than 3 out of every 4 of the properties previously bought at the 2005-2007 peak were sold at a lower price. Comparatively, 46% of the properties that were purchased before or after the 2005-2007 period were subsequently sold at a lower price in April 2011.

Now we are seeing some traction here.  We are seeing an acceleration of the amount of deals that are getting done and prices are falling.  Perhaps, just perhaps those banks, insurance companies, and investors have finally decided just to take the loss on these deals and get over with it.  If this happens we may see more significant drops in price, but this would be healthy in the longer term for commercial real estate.


NAR EXISTING AVERAGE HOME SALE PRICES - http://www.realtor.org/research/research/ehsdata
May average home prices moved up substantially by almost a full 2% from April.  Homes sales in the South and Northeast drove the gains.  While this move up is great, we are still below the December 2010 average home price of $217,900.

ECRI WEEKLY LEADING INDICATORS - http://www.businesscycle.com/resources/
WLI data continues to show weakness. 

SCRAP COMPOSITE INDEX - http://www.scrap.net/cgi-bin/composite_prices.cgi?id=100000&num=5
Scrap pricing has fallen quite a bit since March 7th of this year.  Over the last month we've seen a mild improvement in pricing, but this item should be examined closely over the next month or two.  As we've noted often, Alan Greenspan used scrap pricing as one of his best indicators for financial health in an economy.  It is very interesting in that context to note that scrap has been falling for nearly 4 months now. 

CERIDIAN / UCLA PULSE OF COMMERCE INDEX - http://www.ceridianindex.com/
The Pulse of Commerce Index continues to flash warning signs to us that the broader economy is not as vibrant as our amazing stock markets would suggest.  The PCI has now shown declines in four of the past five months of 2011 and it is clear that rising fuel prices are having a dampening effect on growth.  Recall that the PCI is derived from real time fueling data from commercial long-haul trucks.  This information is a powerful indication of how much stuff is moving across our nation and how those goods translate into consumer consumption levels. 

MONSTER.COM EMPLOYMENT INDEX - http://about-monster.com/employment-index
The MEI released this morning continues to show good things are happening on the job front.  The index level that measures the number of online job listings hit a level of 146 which is the highest point since October of 2008.  I do find it interesting that the annual growth rate on the MEI is only 4% meaning that the improvement is not a great one and the rate of change is falling fast.  I would not be shocked to see this report come in lower next month.  Oil and gas jobs, utility employment, and mining ventures continue to lead the charge in hiring while public administration jobs continue to get the ax.

MONEY ANXIETY INDEX - http://moneyanxiety.com/Blog/page1.aspx
I've added a new indicator to our monthly list called the Money Anxiety Index.  Thanks again Carrz as he is so good at pointing out these cool macro-economic health indicators.  Thanks also to Dr. Dan Geller, the creator of the index for allowing us to use the data and charts, we're happy to have one more item to analyze!

The Money Anxiety Index attempts use economic measures to quantify the human behavior associated with those levels of stress, fear, comfort, or confidence.   Since MAI captures early signs of consumers’ financial anxiety, it can be used as a barometer to consumers’ behavior related to various economic activities.  The level of consumers’ spending and savings is impacted by the level of financial anxiety.    

The MAI is at a very critical spot.  Based on the data, the anxiety level for consumers is at a level not seen since the 1980 recession.  In addition to this, the model also has a solid track record of predicting recessions when the anxiety level increases for 5 consecutive months.  As of the end of June we had seen 4 straight months of increased anxiety.  If next month's number show more worry, this will be a significant indication of a coming recession. 

Check out Dr. Geller's blog and sign up to follow the Money Anxiety Index on Twitter.  (Thanks again Doc!)

COPPOCK TURN INDICATOR -
The Coppock Turn Indicator ended June providing us a buy signal for the markets as the DOW roared past the 12,350 level and closed above it.  Coppock will stay bullish and long unless the Dow rolls back over and drops to 11,800 by July's month end, which seems all together unlikely.  While I include the Coppock for entertainment purposes only, it would seem as though it nailed this last move or got part of it (for once).

6 MONTH EURIBOR - http://www.homefinance.nl/english/international-interest-rates/euribor-interest-rates.asp
6 Month Euribor continues to move higher and higher.  Nothing to see here folks!  While the Euribor rate is actually fine, it really isn't when compared to the 6 Month USD Libor chart below.  My only question is, "Which one of these is mispriced?"

6 MONTH USD LIBOR - http://www.homefinance.nl/english/international-interest-rates/libor/libor-interest-rates-usd.asp
Hello, Houston, do we have a problem?  6 month rates haven't even moved up at all which indicate some sort of financial health.  What the heck is going on here?  We are lower than we were a year ago!  Really?  Everything is just fine!

BLOOMBERG FINANCIAL CONDITIONS INDEX - http://www.bloomberg.com/apps/quote?ticker=BFCIUS:IND
The FCI was looking very bearish just a week and a half ago and then suddenly out of nowhere a tsunami of stock market liquidity and gains blasted the index higher out of near recession level numbers.  The handy work of the last week has revealed that the recession is off the table for the moment according to this market index.  Remember the FCI is comprised of data that captures the health of equity markets, bond markets, and money markets.  The rebound in the Financial Conditions Index is certainly to be expected after the blow out week we just had.

BALTIC DRY GOODS SHIPPING INDEX - http://www.bloomberg.com/apps/quote?ticker=BDIY:IND
Dry Goods Index prices continue to languish.  The oversupply of ships is simply killing these businesses.  These guys are a disaster.  Have you looked at the charts for DSX, EGLE, DRYS, and PRGN lately?  Ouch!  Leverage kills doesn't it?

USD - http://www.bloomberg.com/apps/quote?ticker=BDIY:IND
The USD continues to fall, but we are at the base that has been trying to form.  We'll need to watch the USD Index to ensure that the mid $73.50 level is not breached.  If the dollar falls significantly we'll see a pop in all commodity prices and at least initially we'll see stock prices rise as well.

WRAP-UP
Still have some indicators that are flashing warning signs that the overall economy is weakening.  The key ones to watch are the PCI, Money Anxiety Index, scrap prices and chemical rail tonnage.  The measures paint a broad picture that the rate of recovery is absolutely slowing, if not topping.  I will be very interested to see the new numbers posted on the MAI in the coming week from Dr. Geller. 

I plan to do a post on this later next week, but the European farce is just about to go too far.  I have been waiting for the rating agencies to do what they've needed to do and now that they are finally finding their mojo (they are finally evaluating bonds and rating them appropriately for the risk they carry) the EU and ECB are stepping in stating that they will ignore the ratings!  In other words all the rules are off to achieve the desired result.  The economic and political leadership have used the agencies as useful idiots and now that the agencies now longer are willing to be bought off, there is no need for them.

While equities shot up, commodities seemed to be in the crosshairs of those central banker bounty hunters.  The IEA's coordinated release of oil supplies looked like it was going to finally break the back of commodity bulls, yet after one week we've seen amazing rebounds in oil and gas.  In fact, gas futures are ABOVE the price before the SPR release!  As much as I've been a bull on commodities including gas, I am not taking advantage of this momentum move higher.  I believe that we'll see a move up and then more downward pressure on everything from oil, gas, silver, and gold. 

As I was about to finish up this monthly wrap-up I scanned a headline about Warren Buffett and his notion that there will be no double dip recession.  Now Mr. Buffett has incredible information about the economy because he sees all of the data for all of the pieces that comprise Berkshire Hathaway.  While I noted earlier in the post that BNSF appears to be underperforming last year's tonnage I tend to focus much more when we get talk like this from folks that have big money in the pot at the poker table.  Call me a cynic, but I often believe that guys like Warren Buffett are talking their book more than they are really sharing their insight about the direction of the economy, the market, or a specific investment.  When I hear the Chairman of Berkshire state something like this, I hear that he needs the market to stay out of a recession or else he'll feel some pain.  Clearly Berkshire is leveraged to the homebuilding and construction market with all of his furniture makers, carpet manufacturers, and brick companies.  He needs a turnaround in housing to build a base for improving performance.  I've shared many times that I find it difficult to believe that home building will be a great place to invest for a while.  In my area a new home cost significantly more than the cost of a used home because commodity input prices are so high.  Many of those first-time home buyers cannot justify the additional expense to have the luxury of a new home.  There is also this little problem of a huge inventory of foreclosed homes that make the competition even tougher.  In other words, I don't see the home construction business turning around anytime soon.  As for the economy getting back to 6% unemployment within a few years, there's not a chance.

Earlier in the rails section I mentioned BRK.A, and how it had turned in a negative year-to-date record so far.  Let's take a closer look at the B shares of Berkshire (BRK.B).  I like this one simply because it is affordable!  In terms of setting up a trade here, I really like the action in BRK.B, and especially find it interesting because of the drop resulting from this morning's employment report.  I think this trade could take us easily to a $71 or $72 level for a nice shorting opportunity with an entry here around $76.75.     

Here are two views of BRK.B that I'm watching. 

5 YR WEEKLY (BRK.B)

DAILY 100 DAY CHART (BRK.B)

Finally, the Weekly view below shows the 14 Day EMA under the 40 Day EMA, this "death-cross" view indicates that Berkshire has no momentum and validates the notion that it is a potential short.

That's enough for now, please continue to check in with us and leave your comments.  Have great luck and be careful!

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/



JEDI MIND TRICKS, OIL AND GASOLINE PRICES, AND THE FORCE

"THESE ARE NOT THE DRIODS YOU ARE LOOKING FOR"
Gas Prices are falling a bit and as you can tell from my previous post on Friday I have set a "Line In The Sand" regarding where I'd be stopped out on it. 

There are several things going on that we must be aware of.  I'll lay them out here in bullet form so we can at least have a perspective of what might be pushing this trade lower.

A)  Oil and gas were too high already due to speculation
B)  Middle East unrest was one of the major components of the spikes in oil and gas and there has been an easing of tensions and everything is fine in the area.
C)  Europe and the EURO seem to be coming apart at the seams and this is bearish for global productivity
D)  China and India have have reduced consumption drastically.
E)  The green movement in the USA has discovered a green source for unlimited fuel for cars.
F)  Summer driving season is on hold.
G)  Central bankers realized that this out of control commodity inflation has totally boxed them in and a hit was put out on high input prices. 
H)  A bailout in Europe is effectively a stimulus package gone wild.  Again, the box that central bankers have created is getting smaller.

For the home players out there, I'm inclined to believe that perhaps A, C, G, and H are the only viable answers here.

A)  Perhaps oil and gas got a bit frothy when brent hit $119 or $120 based on the demand out there and levels of inventory.

C)  Euro tension and the Greek situation can't be good for making Europe move forward and growing.

G)  Of all the answers, I think we can see that the guys that have the most to gain from a drop in oil and all commodities are the central bankers.  Coordinated moves to hike margin requirements and douse the flames of speculation are in the interest of these financial leaders.  If the price of oil cannot be controlled, the economic engineers have no room to extend stimulus, because each additional dollar provided is drawn away to speculative assets or consumed to pay for high priced inputs.  The drag caused by high commodities is nasty and has been the target of verbal attacks by Ben Bernanke when he stated that inflation is "transitory".  As we've discussed, he is making this statement to form expectations and drive the market in the direction he desires, trying to "Jedi mind-trick" the market into believing that "inflation is transitory".

H)  If the ECB and IMF and countries step up to bail out Greece, we should see a trade where gold and silver rise, perhaps oil and gas due to since it is inflationary.


JEDI TRAINING INCLUDES ENDURING HIGHER GAS PRICES
Adrian Mitchell and Jennifer Waters have a conversation about gas prices in the pop-up link below.
http://www.marketwatch.com/podcast/podcastpopup/Money%20Markets%20And%20More/4


I've summarized several of the key points;

• Consumers initially freaked out when gas prices were rising in January and February.  At this time, they are now calming down and are making the assumption that gas prices won't be high forever, that they will be  flat to down next month.
• Fewer delaying car purchases
• Consumers now say they feel better and are not considering themselves poor anymore.  Who are these people?  They are still poor.

According to the interview, they quote a report by Richard Hastings of Global Hunter Securities who says that we cannot assume that just because we have a dip in gas prices that the consumer is back.  He had estimated that consumer spending in May and June would be choppy and despite a little relief, consumers are slow to change habits now that they have ingrained some budgetary discipline.  In other words, people say one thing (like things are better) but when things have been bad it takes them 4 or 5 months to act.
 
Finally, the message is that if conditions of falling prices persist we might see improvement in spending and a thawing of the conditions of the frozen consumer, but when gas prices go up again, then all bets are off and we'll see a big slow down.

Ultimately, there is a feeling sigh of relief, US consumers are dealing with the change and budgeting in the price of gas.  They say that the take away is that the consumer is not going to make any rash decisions during this time.


MACRO THOUGHTS - (USING THE FORCE)
While I have a hard stop on my UGA positions I must reiterate several key thoughts about oil and gas. 

First, the impact of the growing consumption of oil by China and India cannot be ignored.  This  is one of those major macro ideas that sets the foundations for long-term trades.  If oil dips or even crashes, the long term trade fundamentals will be in tact and that should be reason to buy oil and gas. 

Second, Middle East tensions have not abated at all.  There is no reason to believe that peace has returned to an area where discord is the norm.  We must watch Iran closely at this time.  Any major actions in the Middle East have the ability to push oil and gas through the roof.  Also Libya is a mess and the entire conflict is about oil, don't let the cover story about freedom fool you.

Green transportation is quite unreliable.  Until I can be assured to go 450 miles without a refill or a plug in, AND maintenance of batteries is not astronomical, as far as I'm concerned it is a waste.

Don't let the central banker box idea pass you by.  We are going to see many creative steps engineered by central bankers in an attempt to wriggle out of the inflationary box they have created.

$48 is still the stop on UGA.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at www.goatmug.blogspot.com

JAPANESE CENTRAL BANKERS GET IN THE GAME! (CAN THEY LEAVE AT THE TOP OF THE HILL)

A super quick snapshot (who can do more than that at 12:49 AM in the morning?) on the impact that our Japanese Central Bankers are having as they intervene in the currency markets.  Essentially they are attempting to force the Yen down because the strength of their currency is hurting their companies as they try to export to world countries.  Since our (the world's) currencies are worth less it takes more of our currency to buy their products.  In the world of global competition, this is a no-no.  No one wants a strong currency, just ask the Chinese - they have artificially weakened theirs for years in an attempt to dump their junk on us and keep the prices low.

As I stated many times, ALL of the central bankers will join the race to zero interest rates and keep the "growth of the economy going".  When their policy tools have been exhausted, they sometimes rely on the mechanism to attempt to spur asset price increases by attempting to drop the value of their currency.   In stating this, I made the prediction that we'd see some (several) major currency devaluations this year.  The Japanese are doing their best to get in the game.

As of now, here are a couple of screen shots of my favorite site to check on the status of the Nikkei when I can't sleep, or am about to drift off into a pleasant dream.  If you want a real time Nikkei update this is a good site - http://e.nikkei.com/e/fr/marketlive.aspx

So, what is the result of all this intervention?  Well, just as we see here in the USA when the central bank makes efforts to devalue the currency, the stock markets lift off in a celebration!  But like most parties, the happy times usually don't stay that way.  Back when I used to drink I used to have a saying that you needed to leave a party "At the top of the hill".  That usually meant that when I was having the best time it was a signal that I needed to leave.   Unfortunately we've seen that central bankers have no concept of leaving before the party is overdone.  Their history of blowing bubbles and pushing easy money and lax credit on undeserving consumers is well documented.  Why would we expect the Japanese that have tried these measures many times to be successful now?  While the party may continue for a brief time, this should set us on alert for a new rise in the yen (after it drops for a couple of weeks) and for a new fit of competitive devaluations from central bankers all around the world.  We can't let the Japanese have all the fun can we?

If you own Toyota (TM) and you get a nice pop on the move perhaps you should consider leaving while your at the top of the hill.

Who gets hurt in this?  Well, first off, any trader around the world that was long (held) yen.  The drop in value of the yen could really damage a trader's account especially since most traders use leverage (borrowed money) to create out sized gains (and losses).  Second, a Japanese citizen that is looking to purchase goods from outside the country can now buy less of that good with the same amount of yen.  Finally, if this could somehow actually create inflation in Japan (it won't) then holders of those awesome Japanese bonds that yield 1% interest each year could see the value of their bonds clobbered.  Now it is important to note this isn't an official devaluation like we've seen from some of the emerging markets countries, but the impact is clearly focused at intervening to drive down the value of the yen.

Be careful.

GOATMUG



WOPR JUST TOOK US TO DEFCON 4 -

Remember the computer from the movie War Games --- the WOPR?  Remember how it just wanted to play a game?  In playing the game the computer began automatically ratcheting up the security protocol for the US and it perceived the game was real and couldn't differentiate between the two.  Well WOPR just kicked up the alarms a few notches!

If you weren't at Defcon 4 or 5 you better be now.  The Germans made some unilateral decisions that might be the sudden catalyst for upsetting the finely tuned ponzi scheme that all central banks have been playing for the last few decades, but really moving all their chips in over the last 14 months.

The decisions made by the Germans attempt to do a number of nutty things but they essentially are trying to ban speculation of government bonds.  They also attempt to ban shorting of their top 10 financial institutions and insurers and ban on naked CDS.

HAVE THE GOVERNMENTS LEARNED NOTHING?  It was the shorts that have uncovered and discerned all of the lies in the credit and equity markets.  It is the shorts that continue to uproot the misdirection and over leverage in banking and government debt.  It is the shorts that provide liquidity and fodder for bulls when the markets turn around.  As we witnessed when outlawing shorts is implemented there is typically a brief move upward followed by a complete meltdown.

When word of the ECB and IMF bailout surfaced last Monday word hit the street that German citizens rushed (not walk) to gold and silver dealers and quickly bought out domestic supplies.  The Germans have the strongest economy in Europe and if there was an actual referendum on whether to bail out the Greeks or other nations it would certainly fail.  And this point is crucial.  Have you noticed that all participants in this world crisis are unwilling (citizens that is).  Did you get a proxy statement in the mail regarding your desire to have the United States provide $50 Billion to the IMF (we are 17% of the IMF funding)?  No, your dollars are being spent and national sovereignty and representative government is being usurped.  Congress appropriates funds not some IMF, the FED, or the Treasury!  You are witnessing the disconnect between the ruling class and those that are being ruled.  In the US we like to claim that we are free, but clearly use of our tax dollars to support an island in Southern Europe does not benefit us nor is there a likelihood of repayment.

What would cause the Germans to buy gold?  I think those citizens know that the Euro cannot last given the pressures that are mounting.  Several nasty things can happen as a result of the one-sided decisions made by the Merkel led government in Germany.

First, Germany's sovereign debt may drop significantly in value as traders and portfolio managers attempt to exit positions related to their country debt.  Look for US Treasuries to go higher in value and yields to continue to drop.
We'll see European stocks drop and also we'll ultimately see German banks drop significantly.  Any rational investor must be asking what the German government regulators are seeing on German balance sheets and what is causing them to strike out at short sellers.  Look for these very institutions that are being protected to get hammered as people exit positions in fear.

Of course the dollar will rise.  Large banks in the US will get hit although larger US firms that pay dividends may go down less as there will also be a flight to safety.  Think utilities and telecom here.

Global contagion is a real possibility here.  In the 30's the 2nd collapse in 1934 was caused by the failure of a German bank - by the way, that drop in the stock market lasted for a couple of years and amounted to an almost 70% drop.  In the depression there was also a move by world governments to create protectionist schemes and make decisions that impacted other nations unilaterally.  (Sound familiar?)

I'll post more, but you've been warned and I hope as usual that I'm just being alarmist.

GOATMUG

BATTLE STATIONS - CENTRAL BANKS TAKE AIM AT OUR POLICIES

Breaking News
Just wanted to update you on some breaking news related to currency and overseas investing.

Please read the following story from CNBC regarding the Brazilian government preparing to levy a 2% tax on all financial capital inflows.



http://www.cnbc.com/id/33357363/site/14081545/for/cnbc/

You Don't Want Our Currency --- Really!
Why would a country do this? What would make Brazil, the shining star of Latin America, take drastic steps to stem the tide of money flowing to their country? They were just given the "honor" to host the 2016 Olympic games, and now they are declaring war on inflows of money?

Well, let's examine the strategies we've highlighted for the past several months. At the end of each monthly analysis I end with the same commentary. "Watch the dollar. If it continues to go down, buy commodities, invest overseas, and buy other currencies." There have been no other themes since my first post here in August.

What are the implications of millions of investors in the US and the world following those exact instructions in one concerted herd-like effort? Simple, as investors shun USD assets like stocks, bonds, and savings accounts that yield nothing, in an attempt to devour off shore investments, we must convert our USD into the foreign legal tender of that nationality. As more and more of our like minded friends pile on, the foreign currency (Real in this case) begins to appreciate in value in comparison to other currencies.

Your Demand for Our Currency Hurts!
Why is this a problem for a country like Brazil? This increase in value of a national currency is a problem for countries like Brazil and Japan because they have many industries that export manufactured goods and raw materials throughout the world. These countries begin to suffer when their currency increases in value because importers that purchase the goods must pay more than they otherwise would for that same good.
A good example is a Japanese company like Toyota. Because the Yen has gone up 20% or more relative to the USD, the Japanese price for the car has technically increased by 20%. Will the US consumer care if a car is 20% more expensive? Heck yes! In reality, Toyota doesn't have a floating car price, so what happens is that the appreciating currency actually causes a loss to Toyota in Japan if they sell a car when those USD are converted to yen. The other solution Toyota has found is that they simply have begun manufacturing cars here in the US to mitigate some of this currency translation issue. Still, if Toyota HQ repatriated ALL of the USD housed here in the United States, the company would take a massive currency loss on the conversion.


Ok, so we can see that if we are a large oil producer or steel producer in Brazil, a rising currency hurts business and slows purchases down as foreign importers begin looking for alternative suppliers. Making matters worse is that the United States also is devaluing its currency on purpose! Emerging markets countries like Brazil get the double whammy as they are suffering from the inflows of all the "created" money looking for a home and the US keeps clobbering its own currency. Do you think many US buyers are actively seeking out purchases of goods and materials in Brazil? The answer is no.

Is It All Bad?
Is it all bad for Brazilians to have a strong currency? No, if they are purchasing imported goods or overseas goods, they seem to be on sale because the purchasing power of their currency is elevated. Think about Europeans coming to New York and Florida buying real estate. The currency exchange rate makes our property seem like it is on cheap.

Let's go back to the article now. What did Brazil suggest that it was going to do to curtail these inflows? Brazil will add a 2% tax on all incoming currency flows. This could slow, if not halt the influx, maybe.

Investment Implications
How exactly might the 2% impact us as investors? If you are an investor in EWZ (Ishares Brazil ETF) you might notice that after hours trading shows that the etf is down $2 or more. While this story is just breaking, I can speculate that new monies flowing into the etf may soon be subject to this 2% tax!!! The ETF takes your investment dollars and purchases ADRs (American Depository Receipts) and stocks in Brazil. It will be quite tough to continue investing directly in the country if every dollar receives an up front 2% hit. Talk about an extraordinary expense ratio!

Does this change mean you run like crazy from EWZ? Perhaps, but it may also mean that we short EWZ for a possible draw down on the news. Even as I type this post, I am not seeing any new news listed under the ticker symbol for EWZ. In addition, any reversal in the dollar will hit EWZ as well.

Why is this important for the United States?
I keep posting on the the weakness of the dollar because it has huge implications for us as investors. Our policy of a weak dollar, (the Fed says we believe in a strong dollar, I know), will have international implications. Brazil is not the first to act as Korea and a few other exporters last week attempted to buy a few billion dollars worth of dollars to reduce the value of their own currencies. Personally, I think the Korean approach is a waste of dollars as I believe strongly that our Fed intends to take our currency much lower. I think t he Brazilian approach is unique and interesting. I'm not sure it will work, but you are really starting to see foreign central bankers try to take action to address the US tactic. Economically speaking, the US is "attacking" these countries and putting pressure on them. You will begin to see increased hostility from exporting nations directed at our country.

Goatmug