Inflation

There are two camps and they argue bitterly. One claims that prices rise because of supply and demand factors (which is partially true) and as a function of a healthy economy, which is patently false. The other side argues correctly that prices rise because the supply of money and/or credit has increased – effectively monetizing demand, which pushes up price levels. Some analysts have argued that there is no inflation because the price of electronics always seems to drop. In the second half of 2008 they argued that there was no inflation because petroleum prices were falling. They made the tragic mistake of substituting a single good for the concept of ‘general price level’.

It is categorically impossible for general price levels to increase in the long run without a commensurate increase in the supply of money and credit. It is important here to make the distinction between short and long run. In the short run, an increase in general prices can be absorbed without a growth in the money supply because it could, in theory, be sustained by devouring savings. But in practice, generally speaking, that isn’t how things work. People tend not to expand spending unless they feel comfortable that money and (particularly) credit are readily available. The housing bubble of the early 21st century is a prime example.

Bubbles

Out of fear of destroying a very easy point, I am going to let the three charts shown below along with a very brief narrative speak for themselves. Then you decide what fueled the housing bubble, and drove up house prices along with general price levels.

As can easily be seen in the above chart, 30-year mortgage rates dropped steadily from 1981 through the present. Not surprisingly, low rates and readily available credit led to a massive price expansion by monetizing demand.

Clearly the expansion in money had to come from somewhere to fuel lower mortgage rates and the expansion in home prices. The chart below, with brackets for the 1990-2007 period shows exactly where it came from. M3 in the US nearly tripled during that 17-year period.

Deflation??

One thing that should be utterly frightening is the recent freefall of M3 growth. Most folks understand that inflation has been responsible for the vast majority of our economic ‘growth’ over the past century. Inflation fueled the dotcom and real estate bubbles. In short, our economy is set up to run in an inflationary environment. Unfortunately, there is a predictable end to this scheme. At some point, the monetary environment devolves into hyperinflation, then a deflationary collapse. We certainly haven’t experienced hyperinflation yet in the US, and we know the Fed can win a battle with deflation because it can create as much money as is necessary to overwhelm deflationary forces. The current Chairman didn’t get his nickname because he used to fly puddle jumpers. So we’re left to ask: what exactly is going on here?

I think the answer lies in the fact that there are roughly 20 countries right now that are on the verge of bankruptcy and an outright default – the US and UK among them. The US clearly isn’t the only nation in hot water with debt. Greece is a pitifully minute example of what is really a systemic problem for much of the West. In my opinion, we are likely moving towards a coordinated outright default, which will involve the devaluation of currencies followed by central banks capping money growth, which in turn will trigger a second deflationary depression. Most people realize that we now have a fiscal gap of around $100 Trillion just in the US alone. It cannot be filled via conventional means consisting of tax increases and program cuts. I and many others wrote years ago that we needed to address those issues right then or lose our chance. We didn’t do it. There are two choices now: hyperinflation or default. While the collapse in M3 growth does not yet constitute de facto proof that we’re headed for the default scenario, it is certainly something that has to be considered. The good news in that scenario is that cash money would be worth more because it would be in short supply. The bad news is that there won’t be enough of it to maintain our current standard of living – especially in a situation where there is a concurrent devaluation.

Gold

Many will be wondering how I can be an advocate of Gold and Silver in such an environment? The benefits of precious metals are well documented in the case of hyperinflation, but not so much so in the case of deflation. It is a pretty simple and logical conclusion that if there is a shortage of cash, then the presence of cash ‘substitutes’ will be very beneficial. This is especially true in local commerce as in the 1930’s when many areas saw the widespread use of ‘co-ops’ or local trading blocs. The rationale for holding precious metals will be different than if we experience hyperinflation, and their use would be different as well, but I think it is foolish to assume that they’d be a detriment in either case.

Hopefully everyone reading this understands the importance of watching the monetary aggregates for clues as to what is coming down the road. Thanks to nowandfutures.com for providing the continuation of the M3 series depicted in the chart above. Ultimately, our monetary destiny now lies in the hands of global banking interests. We will proceed down the path that best serves them, not our national interest. Congress abdicated its responsibility for our money, as outlined in Article 1, Section 8 of the US Constitution, when it passed the Federal Reserve Act back in 1913. The best thing this Congress could do with the rest of its time is craft and pass legislation to repeal that Act in its entirety.

This tax day, April 15th, we’ll be releasing the next issue of The Centsible Investor. Our focus this month will be on the President’s Working Group on Financial Markets, aka the Plunge Team. We’ll also examine the prospects for $100 oil and analyze a company that makes its money selling electrical generation, process automation, and a vast array of other products to industries ranging from petroleum exploration and pharmaceuticals to automobile manufacturers. Don’t miss it! Click Here for more information.

Unfortunately, turning on the television won’t do much in the way of helping one to find answers in this regard. Much like the medical community, the financial and investing world is littered with incomprehensible jargon, which can be downright boring at best, and impossible to follow at worst.

The Elusive Concept of ‘Value’

So how exactly does one ascertain the value of a stock? This is absolutely the wrong place to start, and this is one reason why many folks never get their investing careers off the ground. You cannot start with the capital stock and back your way into the value of the company, its product pipeline, revenue streams etc. First of all, there are many flaws with stock prices, the biggest being the fact that there are emotional and irrational human beings involved in the formation of those prices.

Just think of the dotcom blowout a few years ago. Anything with ‘E’ in front of it headed for the Moon, but ran out of rocket fuel halfway there. Those carcasses of financial recklessness are still drifting in outer space and should be a testimony to the rest of us of what can happen when we allow our emotions and irrational nature to control our investment decisions.

The second is that there is generally some level of incomplete information. The Internet has helped mitigate this to some degree, but at any given instant in time, there are some buyers who know a whole lot more about a firm than others. And to compound matters, occasionally firms will withhold negative information from the markets until a certain time such as the end of trading for the day or week. What was a ‘rational’ price at 4PM ET on Friday might suddenly become an irrational one when the market opens Monday morning as irrational people scramble to catch up with the information.

In my opinion this is where the Internet has actually had a deleterious affect on accurate stock price formation. People aren’t investors anymore; they’re traders. They buy black box software that spits out red and green arrows, and then click mouse buttons based on those arrows. They know nothing about the underlying security, nor do they care to know anything. Just make me rich they say. I’d say the smart money would bet on their financial demise and be right more often than wrong. The proponents of such systems will be the first to tell you that their methodology takes the emotion out of trading. But they neglect to tell you that their system is based market data, which is the result of all the other emotional traders out there. So how devoid of emotion is it really? We could go on for pages on this topic, but I think the point is clear.

It would certainly seem that when the accurate (but by no means complete) analysis above is considered that the deck is stacked against someone who is truly inclined to be an investor. Not so at all. Navigating today’s markets is all about being a filter. Filtering noise. Filtering meaningless ‘events’ in favor of information that might change a trend or an assumption that one has made. It is about conviction. It is about being able to sit back and watch while the rest of the world goes absolutely berserk. It is also about recognizing that prices oscillate around the approximate tangible value of any financial instrument much like a sine wave. Obviously once you’ve identified your target stock, you want to buy when the price is oscillating below your measurement of its real value. In other words, you buy it on sale. Conversely then you would want to sell it when the price is peaking above the real value thereby selling it at a premium and maximizing your profit. If it were truly that simple however, I wouldn’t need to write this article at all. The market throws enough curve balls at investors as it is. If we can nail down an approximate real value of the financial instruments we are interested in purchasing, we have a fighting chance of doing well.

One important carryaway message from all this is that you must have patience. Our world has fallen prey to the doctrine of instant gratification. Everything must be instant or immediate. Processes that used to take days and weeks to initiate and complete now take minutes and hours. Two prime examples come to mind. The time it takes to purchase a home and the time it takes to invest money. It used to take weeks of shuffling papers to buy a house. Now it can be done in a few days’ time if everyone is properly motivated. The same is true for investing. People opened an account, purchased their stock and then watch the Sunday paper from week to week and charted their progress. Look at all that has happened because making large financial decisions has become too easy and the rational thought process became susceptible to impulse. The problem is that patience just isn’t cool anymore. It isn’t en vogue. After all, the rabbit always beats the turtle….right?

It is my goal over the next few weeks to give readers a window into valuing financial instruments. Once the value of an instrument is known, then it is just a matter of waiting for your price. However, it is not really appropriate to think in terms of things going on sale at your favorite electronics outlet. There are only two reasons someone buys a financial instrument. They are either purchasing a cash stream as in the case of a dividend-paying stock or they are purchasing the instrument in the firm belief that someone will come back at a time point in the future and buy it from them for a higher price than they paid. When you go to your favorite electronics outlet, you’re buying something to use and the thought process is different.

Zeroing In on Value

Probably the first mistake people make in beginning their search for suitable financial investments is they start with a preconceived notion of what is ‘hot’. They get a tip from a friend or see the name of a firm in the financial section of a magazine or newspaper and decide to begin searching. In reality, the best way to start valuing financial instruments is to first figure out which of them are actually worth valuing in the first place. This approach is often called the ‘top-down’ approach and it starts with coming to a general understanding of the economic environment under which one is operating. What is the direction of interest rates? Is the borrowing environment friendly or restrictive? Are consumers extending or retrenching? What is the condition of the labor market? Are trade conditions favorable due to currency and political factors? And what about energy costs for product transportation?

These are just a sampling of the questions that you will need to find answers for. It was by this process that it was easy for me to eliminate most things dealing with the consumer discretionary sector as the economy dove into recession in late 2007. Seeing that recession ahead of time prevented misallocations and the subsequent losses that would have occurred. There were other sectors though that had their problems. Some have already since emerged in dramatic fashion, while others have yet to.

Once you have some answers and a basic economic analysis, you can pretty much tick down through a list of industries and themes and find the ones that will be well-served by the current environment and those to stay away from. It is perhaps even more important to form something of a forecast for at least the next year to two years. Once you get past two years, it becomes exceedingly difficult for even the most gifted economist to be accurate given the complexities of a modern world and financial system.

Themes versus Forecasting

One of the biggest problems with economic forecasting is that it is both time and resource intensive and is a full-time job. That said, forecasts are easily purchased from a myriad of sources at a cost. Perhaps another way of looking at things and deciding on which areas are worth further scrutiny is by using themes. It is pretty simple. Take the debt situation that exists in the United States today at a government, state, local, and personal level. It would seem to be a pretty good bet that this will impede economic growth well into the future, and thus absent a lot of monetary creation and stimulus, it is unlikely to see consumer discretionary spending accelerate all that much. That is a theme. Realize we aren’t dealing with percentages, statistical analysis, or anything more fancy than sitting down and applying some common sense to our current realities and coming up with some likely outcomes. We can easily use such themes as a basis for either including or excluding certain sectors for further investigation and analysis.

Notice we haven’t even used one math formula, a calculator or pulled a single stock quote and I’ll bet you’re already thinking of a number of potential themes and comparing them to what is in your current portfolio. If so, congratulations! You’ve taken the first step in performing basic financial analysis. Next time we’ll take a look at identifying the players both large and small in a given sector and looking at the potential benefits and detriments of each. This will assist us in forming an appropriate mix given our risk tolerance and other objectives.

]]> http://www.sutton-associates.net/blog/2009/06/19/basic-financial-analysis-part-i/feed/ 2 http://www.sutton-associates.net/blog/2009/05/15/hedging-your-bets/ http://www.sutton-associates.net/blog/2009/05/15/hedging-your-bets/#comments Fri, 15 May 2009 19:44:52 +0000 TwoCentsEditor http://www.my2centsonline.com/blog/?p=221 05/15/2009

While it may seem rather inappropriate to talk about hedging strategies while the markets are retracing at least a portion of 2008’s devastating plunge, common sense continues to support the position that the worst is yet to come. Granted, focus has shifted to ‘less bad’ economic data and the anointing of government spending as the elixir that will return the American economy to prosperity. Yes, that whole “We’re going to spend our way to prosperity” mantra is once again in play. Make no mistake about it; what we are witnessing right now will be viewed years from now as the biggest suckers rally in history – so far.

That said, now is the time to start talking about protecting portfolios from the next move down. The techniques below were used either singly or in tandem to drastically limit losses in our client portfolios during the 2008 liquidation. Some of these strategies have been sold to the investing public as ten feet tall and bulletproof, but don’t work out too well unless the intricacies are understood. And still others are exceedingly complicated to execute and rely on a preponderance of difficult predictive successes to be beneficial.

Flight to Cash and Equivalents

This move is an obvious one and constitutes either a partial or total exit from the market in question and the capitalization of whatever gains/losses existed to that point. Depending on the type of account you’re dealing with you will have a taxable event. Under many circumstances, it may be detrimental to sell out of the market. This can especially be the case if you are one of those folks who have invested in a dividend-producing portfolio and need the income from those investments for living expenses. Obviously, people in this position don’t want to see their portfolio go down in value, but can’t necessarily afford to sell those assets either.

In terms of the average investor, this is undoubtedly the easiest hedge to execute with the opportunity costs being commissions, possible tax consequences, and the forfeited gains if you’re wrong.

Going Short the Market

Shorting shares and/or indexes is one way investors will choose to hedge portfolios during times when they believe markets will head lower. Let’s use the DJIA as an example.
Let’s say that an extremely prescient (and lucky) trader identified the last major top in the Dow Jones on 5/19/2008 at 13,028.16. That day he shorted 100 shares of DIA at a price of $130.23 for a total of $13,023 with a $10 commission. So our trader has $13,013 in his pocket, knowing he’ll have to cover those shares at some point. Let’s assume once again that our trader gets lucky and picks the precise bottom on 3/6/2009 with the DIA at $66.23 and decides to cover. He buys 100 shares for $6,633 ($10 commission) and has $6,380 as his gain.

Obviously, this is a best-case scenario, and ironically enough, this is often how many investment ‘get-rich-quick’ schemes are presented.

The following is the flip side of shorting the market.

In this scenario, our trader, having seen his brokerage account drop by 25% since the beginning of 2008 decides to short DIA on 10/22/08. He is scared to death of a further decline. He shorts 100 shares at a price of $84.59 on the DIA, pays the same $10 commission and has $8,449.00 in his pocket. Unfortunately, he has picked a short-term bottom and the market rallies substantially immediately after he takes his position and our trader is scared into covering on 11/4/08 at $95.19. Including commissions, his short position just cost him a quick $1,080 – in just 9 trading days.

With the benefit of 20/20 hindsight we can easily point out that our trader would have been much better off waiting a few more weeks to cover. He would not have lost anything, and in fact would have helped his portfolio.

The take-home point here is that shorting is not for the faint of heart. You’d best have a solid understanding of market behavior and fundamentals before even considering short-selling shares. As we learned above, the risk to the trader is unlimited. Lets say the DJIA would have gone all the way back up to its 2007 high after our trader shorted on 10/22/2008. He’d have been out over $5,700. In shorting, the rewards are finite (a stock can only go so close to zero) whereas the risks are theoretically infinite.

For the average investor, shorting shares is difficult in that you must pledge the balance of your account as collateral in case your bet goes bad. This nullifies the ‘qualified’ status of IRAs therefore IRA custodians will not extend margin privileges to IRA accounts. Standard brokerage accounts may be used to short stocks and such an account could be used to hedge other investments. While this strategy may bear occasional fruit, it is not for everyone, particularly those with short time horizons or a low appetite for risk.

Inverse Funds – Not what they’re cracked up to be?

Before beginning this segment, a few things must be said. For those who read this column regularly, you know that I rarely use specific companies or funds in these discussions, and tend to stick to sectors, fundamentals, and macroeconomic conditions. However, in this article, specific examples are going to be used to illustrate the points made and to show investors how these funds don’t always perform the way they’d expect. This is not to imply that there is an attempt to deceive on the part of the fund sponsors, but rather a misunderstanding by the investing public of the stated objectives of these funds.

Dow Jones UltraShort Profund (DXD) – The stated objective of this fund is as follows:

The Fund seeks daily investment results, before fees and expenses that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones Industrial Average.

Let’s use a couple of hypothetical examples to illustrate how a leveraged inverse fund works. We enter our position when the DOW is at 10,000 and the price of DXD is $100/share. For the purposes of the example, we’re going to forget about the expense ratio. While the expenses must be considered, they are not necessary to make our point.

So over the course of our hypothetical 10-day trading period, the DJIA lost 8.28%. Conventional wisdom would have expected DXD to come in at a 16.57% gain. However, it only returned 14.44% (before expenses). Granted, this is not a big difference, but when you start putting it in the context of a million dollar investment you’re talking about some serious money.

Now, for the sake of argument, let’s use DOG, which is the non-leveraged inverse ETF for the Dow Jones Industrial Average, and see what happens.

The performance of the non-leveraged inverse ETF wasn’t quite as bad as it netted 7.64% (before expenses) when compared to an 8.28% loss in the Dow Jones Industrials Average.

Now let’s apply a real-world example from earlier this year and watch what develops:

On February 9th, 2009, the Dow Jones Industrial Average closed at 8270.87. The Ultrashort DOW ETF (DXD) closed at $58.07 that same day. Now, shortly before close on 5/13/2009, the Dow Jones Industrials Average is at 8274.05, while DXD is at $51.33 – a difference of $6.74 from the 2/9/09 price. Conventional logic would have surmised the DXD prices would be within a few cents given the trivial difference in DOW levels. For comparison, the non-leveraged ETF (DOG) closed at $71.82 on 2/9/2009 and sits at $68.60 shortly before the close on 5/13/2009 – a difference of $3.22. Conventional logic would have also expected the price of DOG to be very similar. What is going on here?

Here’s what. It is all in the objective of the fund. Remember how it mentioned the daily performance? These funds track the index on a day-by-day basis, but as time goes on, the tracking becomes more and more sloppy. Volatility enhances this condition as was evidenced in our 10-day hypothetical study from above.

It is due to the fickle nature of mathematics that a 10% drop followed by a 10% gain doesn’t put you back where you started. This is where the inverse funds fail to protect portfolios in the longer-term. Now, if prices always moved in straight lines, the inverse funds would do fine. Obviously prices don’t behave that way. The above analysis should not be construed as an indictment of the DOG and DXD inverse funds, but rather suggests they only be used with a clear understanding of their objectives. Furthermore it must be realized that you might not get quite the level of protection you anticipated even if you’re right and the market goes down but takes a lazy path to get there.

For the average investor, inverse funds are an easy way to ‘short’ the market without actually taking the full risk of shorting. Think of it this way: if you invest in an inverse fund and the fund goes to zero, you’ve lost only your initial investment. Your actual risk is known going in. A second plus is that inverse funds may be bought in non-marginable accounts like IRAs. The major drawback, outlined above, is that you may not get the performance you expected for your buck – particularly over extended periods of time.

Using Options to Hedge Portfolios

Another potential strategy for hedging portfolios is through the use of options. We have previously discussed covered call writing for the purposes of generating income, but this week’s topic varies considerably and requires looking at things from a totally different perspective. This discussion focuses on using options for protection ONLY – not for day trading or other speculative activities.

While this is not intended to be a primer on options trading and involves prerequisite knowledge, there are some important concepts that must be highlighted when using options for hedging purposes. For most average investors, hedging with options involves the purchase of put options, which can be done from many types of accounts. However, individual brokers have their own restrictions on what can and cannot be done in particular types of accounts.

Time – Options are good for a specified period of time and after such time has passed expire worthless. Even in the month (or sometimes more) before their witching (expiration), options begin to degrade in value and investors find that they’re not doing their job in terms of protecting the portfolio. Options have ‘sweet spots’ and if you’re going to use them to protect a portfolio you’d better be able to align the option’s sweet spot with the period when the market’s decline will be most dramatic. Otherwise you’re not getting the full benefit of the option and your portfolio isn’t being protected. This is no easy task by any stretch of the imagination.

Strike Price – In the case of the Dow Jones Industrials Average, put options could be purchased on DIA. If you feel the decline will last 6 months and start today, you’d look at options that expire 11/2009 or beyond. In the case of DIA, 12/2009 put options are available. Now you must decide how far you think the market will fall. Buying an option with a strike price that is too low may result in it staying out of the money in which case you might not get the full performance; especially if the decline is not as steep as you anticipated. Buy an option at a strike price that is too close to the current price of DIA and you’re going to pay a hefty premium for the option. If your prediction ends up being right that won’t be an issue, but if you are wrong, you just wasted a lot of your money.

Know Your Portfolio - A common mistake of investors who use options for hedging is that they buy the wrong option. It is imperative to understand the components of the portfolio that you’re trying to protect. For example, hedging a portfolio of junior gold mining stocks with Dow Jones Industrials Average puts is probably not a great idea. While the junior gold stocks may trace the DJIA to a certain extent there are plenty of times when such is not the case. Using a simple statistical correlation study between your portfolio’s value and the value of different market indexes can help you identify which markets your portfolio tends to track and you can then hedge more effectively.

The major benefit of buying options is that you’re taking a known level of risk. Your outlay for the option and related commissions is the extent of your risk. If you are wrong and the market moves up your option will expire worthless and you lose your initial investment only. It must be noted that this defined risk does not apply when one is writing uncovered (naked) options. These types of activities are extraordinarily risky and are highly inadvisable merely for hedging purposes.

In conclusion, there are many other factors that play into hedging and would require a dissertation to elucidate all of them to proper justice. Each investor must consider their own objectives and risk tolerance and should also consult a qualified advisor before implementing any investment strategy.

The important thing to take away from this discussion is that if done properly, hedging can provide relative comfort during periods of market mayhem such as we just witnessed last year. However, if undertaken without a solid understanding of both the benefits and detriments of the hedging methodology you choose to employ, not only will you not enjoy comfort, you’re quite likely to be a regular in the antacid aisle at your local pharmacy as well.

Improper hedging techniques and use of hedging vehicles are some common mistakes investors make. Consider taking a look at our free report about 7 additional mistakes investors make – and how to avoid them. To get your copy click the following link: www.sutton-associates.net/7mistakes_report.php

Back in 2006, Marketwatch Columnist Mark Hulbert made the comment that those who had invested at the 2000 market top had finally gotten their money back.A long six years to get back nominal dollars that had decayed significantly by the time they were ‘gotten back’.

We wrote the pilot issue of the Centsible Investor in early November 2007; right after the market peak. Was this an accident? Hardly. Our keynote article in that issue dealt with our purchasing power coming under attack and we vowed to put together a portfolio model that would fight inflation by providing a high rate of current income with a secondary goal of capital preservation.

Today, I am proud to announce that while the Dow, NASDAQ and S&P are all down (38%, 39%, and 40% respectively), that the total return on our Portfolio Model is now positive at .51% as of close of business 5/8/09. Where traditional investors had to wait several years from the bottom to get their dollars back, our Portfolio Model has accomplished the same feat in just over 2 months – and has paid great dividends while we waited!

For those who have been subscribers over this 18 month roller coaster called the markets, I am hopeful that our publication has demonstrated its worth and you will consider renewing. For those who have not subscribed to this point, I am hopeful you will consider doing so. The attack on our purchasing power is only beginning and will feed on the inflation created to support unsustainable government spending and the various bailouts. Vigilence is required now – more than ever.

As an added incentive, we are currently offering $30 off our one year subscription. Get 12 issues plus interim updates for just $99. This special will last through Memorial Day.

The Centsible Investor’s Subscription Page may be found below. If you have any questions or need assistance, please reply to this email.

http://www.sutton-associates.net/newsletter.php

Best Regards,
Sutton & Associates, LLC

DISCLAIMER: The statements made in this communication are for informational and educational purposes only and do not constitute an offer to either buy or sell any security, nor should any statements herein be construed as investment advice. Neither Sutton & Associates, LLC nor any contributor to the materials contained in the above-referenced report shall be liable for any losses as a result of these or any other investments.

Recently, there has been more than idle talk about converting most of these loans to equity stakes, which do NOT need to be paid back. Furthermore, future disbursements would like be made by buying equity stakes in the firms rather than making loans. Sound the same? Not quite. Here are some reasons why:

1) In the event of bankruptcy, creditors are paid off before shareholders from any proceeds of liquidation. Given the vaporization of BSC and LEH, this is definitely worth mentioning. Historically, shareholders are left holding the bag in a true bankruptcy and subsequent liquidation.

2) Even if the firms remain solvent, there is significantly more risk in holding equity than debt. The taxpayer’s investment would be subject to all the risks generally associated with holding stocks. Taking a look at the performance of banking stocks during 2008 gives a pretty good idea of what I am talking about here.

3) Current shareholders are negatively impacted by dilution if more shares are created out of thin air for the government to purchase. And even if the shares are bought in the open market, the mere size of the stake could have a rather deleterious affect on existing shareholders should that stake need to be sold en masse.

4) By taking an equity interest, the government is consummating an incestuous relationship with the banking industry. Nationalization is the term typical used in this type of situation, but the term has become taboo in the mainstream media in recent weeks.

5) Also, bear in mind that the banks don’t really need this money at all. They have been printing their own currency for years now via unregulated, non-transparent OTC derivatives. Now that some of their bets have gone bad, the taxpayers have been forced to ‘legitimize’ this activity by the infusion of trillions of less-funny-money (dollars).

Sea changes can be either dramatic or subtle. The recent direction in terms of supporting the financial system sounds subtle enough, but with dramatic results.

Desensitization

Increases in consumer confidence during the past two months are indicative of desensitization. Consumers are becoming acclimated to weak economic conditions, poor stock market returns, and the continued accumulation of job losses. This desensitization has been emphasized by the mainstream media; particularly in the past few months. The take-home message of articles and news reports has shifted to ‘be happy things aren’t getting worse’ and people are doing just that. Bargain hunters have been lured into many areas including housing, stocks, and even retail products. Meanwhile, important fundamentals like GDP, unemployment, foreclosures, and household net worth go largely unmentioned and underanalyzed.

Where are Consumers Spending Their Money?

What is telling, however, are the reports coming out of some individual sectors in the consumer landscape. Traditional economics breaks goods and services down into two major categories: staples and discretionary. This division follows the old-school definition of needs vs. wants. However, today, the lines have been blurred quite a bit and goods that would have easily been considered discretionary even 10 years ago are now regarded as staples.

The following NAICS category charts were selected because they represent areas that are extreme examples in the staple—discretionary continuum. And for comparative purposes, the total US Retail Sales chart is included at the end of the series.

The situation with grocery stores is a primary example of how aggregate consumption numbers are reported, which will be explained in greater detail later in the article. Just reading the chart, Americans spent less at grocery stores from the middle of 2008 through the beginning of 2009, which is when we called the bottom in terms of consumer prices. Did people eat less or just spend less on what they purchased? In all likelihood it is the latter, given that grocery store shopping is one of the most basic of spending types. For the sake of thoroughness, included below is the same chart for big-box/warehouse type stores just in case everyone abandoned their local grocery store for lower prices at BJ’s and Sam’s Club.

You’ll notice quickly that the rate of growth in warehouse club spending has been declining steadily since the beginning of the decade. Spending has also flattened considerably in the past 6 months. Clearly Americans didn’t take their unspent grocery store dollars and run to the warehouse clubs, so our initial conclusion is intact.

Gasoline station spending fell off a cliff from July through December, indicative of falling gas prices and people cutting back on the purchases of accoutrements such as drinks and sandwiches. In a similar fashion to grocery store sales, there has been a recent increase in spending at gas stations reflected by the price of gas jumping from near $1.50/gallon to around $2.00/gallon nationally.

Obviously, jewelry is far at the other end of the staple-discretion continuum, and is a good indicator of purely discretionary spending. It is pretty apparent, at least from this graphic, that this type of discretionary spending (in total dollars) is contracting rapidly, now at a year over year rate of around -22%. Massive discounting by many national and regional jewelers have certainly contributed to fewer total dollars spent as well.

Above, we notice the same tail in total retail sales starting at the beginning of 2009. This change in total retail sales correlates well with our data on consumer level inflation and brings the mainstream’s assertion of the re-emergence of the consumer into question.

Inflation Returns to Consumer Prices

In early January, a number of our in-house statistical indicators turned positive in terms of the spillover of monetary inflation into consumer prices and we discussed this issue in detail in 2/20/2009’s article “The Turning of the Tide?”:

“If we have indeed witnessed the inflection point where the trillions of dollars parked in investment and commercial banks are finally being let out to play, then our wealth and purchasing power are about to come under serious attack. Obviously the risk in putting such an assertion to paper is that if we return to the previous trend of falling prices even for a brief time, the entire construct will be discredited rather than the possibility that the timing was a bit off being acknowledged. There are some factors that would help us to confirm or deny that such an inflection point has taken place……”

Since those indicators went positive, we have received affirmation of our observations from PPI/CPI, the GDP Price Index or GDP Deflator, nominal retail sales, and import prices. It is the retail sales portion that applies here, and the key lies in how that report is interpreted. It absolutely must be remembered that almost all of these aggregate spending metrics report in total Dollars, NOT units. Nor are these numbers adjusted for ‘inflation’. They are adjusted for seasonal factors that are at the discretion of the reporting agency, but that is it. What this means is that increases in consumer prices (especially in staple goods since people are less likely to cut back) will be interpreted as economic growth when retail sales are reported because people are spending more money. Conversely, when prices fall like they did from July through December of 2008, the interpretation will be economic contraction.

So the question needs to be asked: Did people actually buy fewer goods and services (an actual retrenchment) over the past 6 months or did they just pay less for some of the things they purchased thereby causing retail sales to drop?

The answer is more difficult to find than one might imagine.

We know from the Advance GDP report on Wednesday of this week that personal income in the US dropped by an estimated $59 billion (2.0% annualized) as job losses put more and more Americans on the unemployment rolls. The rate of decay in personal income grew from $42.9 Billion or 1.4% annualized in Q4 2008.

The report also gleaned that personal outlays increased .7% in Q1 2009 after falling 9.5% in Q4 2008. Looking for example at the CPI for that period, we find that using the old CPI methodology that consumer prices increased 1.18% for Q1 2009. By extension then, if consumers would have purchased the exact same quantity of goods as they did previously, they would have spent 1.18% more yet they only spent .7% indicating that less goods/services were purchased. A terribly small cutback for sure, but certainly not the growth trumpeted by the mainstream media.

For comparative purposes let’s apply the same analysis to Q4 2008. Using the same CPI methodology as the previous paragraph, consumer prices dropped 2.93% in Q4 2008. So if consumers had bought the same quantity of goods/services, they would have spent 2.93% less. Yet consumers spent 9.5% less indicating a significant cutback.

One conclusion we can draw from this cursory analysis is that while consumers spent more in Q1 2008, they didn’t really buy more. Still, in the face of rising unemployment, falling housing prices, and general economic malaise, consumers are still trying hard to hold onto yesteryear after a very brief period of belt-tightening.

In our ‘Spin Cycle’ podcast, we are currently doing a 7-part series in which we depict the factors affecting the US economy as sides of a Rubik’s Cube – independent, yet interrelated. Episodes include Interest Rates, Economic Growth, Debt/Monetary Growth, Energy, Demographics, Geopolitics, and the State of the Consumer. To listen, visit www.my2centsonline.com/radioshow.php

Main Street Under Pressure

Since last summer there have been fairly regular stories even in the mainstream press about banks cutting limits on credit cards. It would seem as though the bankers had decided that the age of consumerism had gone too far. Ironically, these actions happened concurrently with the largest giveaways in the history of mankind. In the past 9 months the United States, #1 on the world financial stage, has committed an entire year of economic output to stem the ongoing crisis. How do banks respond? By cutting credit card limits. It is like giving a small child sweets until the kid is in a frothing sugar-frenzy, then locking up the candy dish. The analogies are nearly limitless, but the point is obvious. While the banks screamed for the elixir of easy Fed credit, they slammed the door on Main Street. For their part, consumers at some levels have cut back on their spending, which is a good thing. The unfortunate reality is this: Even the most prudent and responsible consumer will have a bad month. There will be a string of unexpected expenses, and that individual might need to carry a balance for a while to get things straightened out. Job losses will cause exactly this type of situation and now in many cases the credit is not there.

Another unintended consequence is that when credit lines are cut, utilization goes up and suddenly the most frugal appear to be on a spending bender. Take the person who has $25,000 in total credit from a number of different sources. Say on average the individual uses $5000/month for regular expenses, but never carries a balance. Now let’s assume that their lines are cut in half. Their utilization just doubled from 20% to 40%. Their new application for a small business loan might now be rejected because they’re judged to be a bad credit risk due to the 40% utilization. More unintended consequences.

Another amazing development has been the continuation and acceleration of foreclosure activity despite all the political rhetoric over the past 15 months from both sides of the aisle in terms of ‘helping’ homeowners. According to RealtyTRAC, foreclosure activity, which includes default notices, repossessions, and auction sale notices, increased 6% from January 2009. This same measure increased nearly 30% from February 2008. So despite trillions of dollars pledged to Fannie, Freddie, Bobby, Lulu, and anyone else with a leaky balance sheet to supposedly assist homeowners, not only is foreclosure activity not abating, it is increasing.

Runaway government spending

As most are acutely aware this tax day, their contribution to the team effort of bailing out the economy will not be near enough. Not only will their continued (and increasing) participation be needed, but that of their children, and grandchildren will be required as well. While I could sit here and tally up the various tabs, totals, and sums, it would be pointless. The public is mind-numb from hearing these staggering figures. It is very difficult to even fathom a billion let alone a trillion. However, this reality has dawned on an increasing number of people over the past few months and they are understandably perturbed. We have hopefully learned a valuable lesson, and that is that liberty is akin to a seedling. It is planted, but then must be watered, fed, and protected from the harsh environment in which it lives. While Americans were out collectively living it up over the past umpteen years, that harsh environment has wreaked havoc on our seedling. The bad news is that we’ve got a lot of work to do. Hopefully the sheer magnitude of our task doesn’t discourage us from doing it.

Big Bank Profits = Bubble Watch

After 6 quarters of dire forecasts, failures, predictions of failure, and uncounted bailouts, big banks are suddenly earning money again. Interestingly enough, most of these newfound profits are coming from the investment banking sides of their businesses. Translated, that means they’re back to their old tricks again and it is back to business as usual. Secure in the knowledge that their backs are securely covered by ‘We the People’ and without fear of extinction, the winners of the 2008 financial crisis have been refreshed, revived, and are back at it. Since our economy and monetary system are still compromised by the same structural imbalances that existed before the crisis, it is again time to go on “Bubble Watch”. The ingredients are there: very cheap money from the Fed and existing dislocations in many markets. The only thing missing is you. And this little fact could cause quite a problem. Americans, quickly growing weary of the accelerating boom-bust cycles, and still punch drunk from the last beating are not likely to be as willing to participate in the next bubble.

One of last fall’s pieces focused on the causes of the Great Depression and tried to dispel the myth that the market crash of 1929 was somehow solely responsible for the mess that followed. We pointed to a nagging reality from 1929 and that was the proportion of Americans living in poverty. More than half were living below a minimum subsistence level, which at the time was $750/year. Essentially one half of the population was unable to support further economic growth. That was one of the underlying structural imbalances. The crash and subsequent misguided government responses were the triggers that caused the Depression.

How much different are we really today? Sure, the poverty line has been adjusted upwards in nominal terms, but fundamentally, how many Americans are below it now? Perhaps the most important variable that has changed in the past 70 years is the reliance we have on credit as a society. How many of us would be living below the poverty line, unable to participate in the economy were it not for VISA, Mastercard, and equity lines of credit? The recent spikes in unemployment will only exacerbate the situation, causing further reliance on credit for subsistence; credit which is shrinking by many measures.

In conclusion, it is particularly disheartening that nearly all of the political focus spanning the last two administrations has been about getting credit flowing again, with only token talk of job creation and fostering legitimate economic growth. The actions have been no better. The vast majority of bailout and stimulus dollars have gone to the financial system to encourage lending and borrowing rather than to the real economy. Our fiat monetary system’s reliance on debt for its growth is the elephant standing in the room each time a press conference or media event is held. It is the elephant nobody in charge wants to talk about. It is the question nobody in media wants to ask. And, at the end of the day, I would imagine that is why so many people came out on Wednesday and will continue to do so. They aren’t interested in parties. They just want to talk about elephants.

Gresham’s Law

Gresham’s Law deals with a situation when there are two (or more) competing currencies and one is ‘pegged’ against the other. More specifically, the law deals with bimetallic currency systems where both Gold and Silver are used in an economy and the ratio of the two is fixed. A good historical reference would be the post Bank of North America United States in the early 1800s. The US Constitution in Article 1, Section 8 gave Congress the power to coin money and determine the value thereof. A Constitutional Dollar was determined to be a coin containing 371.25 grains of pure silver. In order to encourage the use of gold as well as Silver, the ratio was set at 15:1 – therefore a Constitutional Dollar could also be a Gold coin containing 24.75 grains of pure Gold. For anyone who knows Gold, 24.75 grains is not a very large coin so coins that contained 247.5 grains of Gold were used and were valued at 10 Dollars. So far, so good, right?

The only problem here is that the exchange ratio of any two goods will vary over time. When the 15:1 value was set, that was the going market rate. Alexander Hamilton, who was a big proponent of the bimetallic system, gets an “A” for effort, but failed to recognize and/or provide for the constant fluctuation. In the case of the Gold-Silver ratio, the supply of Silver grew disproportionately to that of Gold due in large part to mining in the Caribbean. The silver made it to our shores thanks to a vibrant trading relationship between America and that region of the world. This is where Gresham’s Law comes into play. The law states that anytime one money is compulsorily undervalued while another is overvalued, the undervalued money will be driven out of the economy or hoarded while the overvalued money will explode into circulation. In following Gresham’s Law, Gold all but disappeared from circulation in early 19th century America. With the obvious consequences of Gresham’s Law, it is easy to ask why any government would forcibly attempt to impose a bimetallic standard on an economy? Hint: It must be remembered that in absence of paper money, the supply of money in the economy was determined by the quantity of specie (Gold and/or Silver).

The monetary ‘authorities’ at the time were attempting to make sure that the economy had enough money to function properly, which was certainly a good intention. Where they went wrong in their approach is that the economy could have easily functioned on silver alone since it was in good supply. Market prices for other goods would have adjusted themselves through the laws of marginal utility and supply/demand according to the supply of both specie and the other goods.

Gresham’s Law is easily observed today in our own currency system with a slight variation. While the Dollar and Gold are allowed to adjust to a certain extent in terms of each other, it is easy to see how the undervalued money (Gold) has gone into hiding while the overvalued ‘money’ (Federal Reserve Notes) have flooded into circulation.

Early American Attempts at Fiat Paper Money

Perhaps ironically, America’s first attempts at fiat money began before Lexington and Concord. Before the French and Indian War. And even before the 18th century had seen the light of day. The first government issue of paper money came in 1690 in the colony of Massachusetts. It had become a custom there to embark on plundering missions into Quebec and then use the proceeds of the missions to pay off the soldiers upon return to the colony. In 1690, however, one such mission was unsuccessful so there were no spoils to distribute. In order to placate the soldiers, the colonial government attempted to borrow the required money from local merchants. However, these merchants had a rather dim view of the creditworthiness of the government and refused. In an ill-fated decision, the government of the Massachusetts colony then decided to issue paper notes with the promise of both redeemability and that the issuance was a one-time affair. They ended up being wrong on both counts.

These endeavors continued almost constantly up to and through the American Revolution with two predictable results: the notes issued always depreciated versus the competing specie money and the amount of paper notes issued got larger with each subsequent attempt. These comparisons are important to make when connecting early monetary ventures to what is going on today.

The “Continental”

Early in the American Revolution, the Continental Congress ran into the serious issue of funding and opted to look towards fiat money for the solution to the problem. Unlike some of the previous redeemable fiat ventures, the ‘Continental’ as it became known was not to be redeemable at all, but would rather be dismantled after the war ended by using taxes paid by the colonies. While this was a temporary solution, it carried the double whammy of inflation and taxation for the colonies. Certainly, sacrifices had to be made, but what is most interesting is what happened next. From 1775 through 1779, the supply of Continentals exploded by over 1800%. Predictably, the value of the Continental in specie (silver) had fallen to 42:1 from a beginning value of 1-1.25:1. By 1781, with the war still raging, the value of the Continental had fallen to a negligible 168:1. Comparatively speaking, today’s fiat dollar which traded with specie (gold) before the Great Depression at a rate of 20:1 now trades around 950:1 – a similar hyperinflation although over a much longer period of time.

The next step taken by the colonial government was to impose price controls and attempt to dictate the market value of the failing currency. These efforts flouted several of the laws of economics, the first of which is that you cannot run an effective paper money system without confidence. The second is that price controls create shortages by artificially setting the market price below that of the equilibrium price as is illustrated in the chart below:

With the impending failure of the Continental in 1779, the Congress resigned itself to allow the Continental to depreciate unredeemed into worthlessness. However, and tragically, the Congress then resorted to issuing loan certificates for the purchase of goods and services from Colonial merchants and refusing to pay anything in else. Soon enough the certificates became used as a currency and, much like their brother the Continental, began to depreciate. Here’s the important part though. Instead of allowing the certificates to be redeemed at a depreciated value, they were carried into perpetuity and the permanent Federal debt was born. This unpaid bill is better known today as the National Debt.

The Bank of North America and Robert Morris

In 1781, Robert Morris introduced a bill that created both the first commercial bank and the first central bank. The resulting catastrophe, headed by Morris himself, opened in 1782 and quickly ran into problems. The first of these problems was our old friend confidence. Americans, already weary of paper notes due to decades of failures, inflation, and broken promises just couldn’t shake the perception that the new bank’s notes were being inflated compared to the still-existing specie. The bank, in an extraordinary move at the time actually went as far as to hire people to promote the new bank and its notes and to insist on redemption for specie. Obviously the idea here was to gain the confidence of the public by demonstrating that the notes were in fact worth something. Paradoxically, today’s Fed doesn’t even try to maintain an illusion of backing or intrinsic worth.

The First Bank of the US – 1791 (above)

This first experiment into central banking lasted barely a year as in early 1783 Morris moved to end the institution’s authority as a central bank and shifted its focus to commercial activities with a Pennsylvania charter. Although short, it was one of many important steps in the establishment of a central banking authority. Perhaps most importantly, the population grew more accustomed to using paper money. By the 20th century, specie was removed from circulation in totality while the ability to redeem still existed. Eventually, redeemability was suspended as well, leaving us with a paper currency with only implicit worth. In 1971, in a final blow to sound money, settlement of foreign debt in specie was suspended as well. What has transpired since has been a slower, but eerily similar version of the demise of the Continental.

In conclusion, there is absolutely nothing wrong with paper money in and of itself. It can actually serve a valuable purpose in that it is more portable, easily divisible, and in the case of the grain banks thousands of years ago, was much easier than moving bushels of wheat. However, the predilection of those charged with running these types of operations has been to coerce and conspire to rob the people of wealth through stealth. Whereas it would have been exceedingly problematic to confiscate a farmer’s grain without incurring his wrath, it was magnificently simple to inflate his wealth away through the over issuance of grain receipts. The parallels between these early experiments and what goes on today are astounding. We as a people still haven’t gotten our heads around the idea of inflation – the over issuance of fiat paper money – and the confiscation of wealth it represents. What could never be done through direct taxation has been done under another name, right under our very noses, and in plain sight.

Don’t miss out on your free copy of our report “The 7 Mistakes Investors make..and how to avoid them”. Get your copy today by going to our website www.sutton-associates.net and clicking the free report banner.

Sources:

“Man, Economy, and State” Rothbard, Murray N. Mises Institute.

“A History of Money and Banking in the United States” Rothbard, Murray N. Mises Institute.

Disclosures: Long GDX

It is the latter statement that causes me to reflect this week on the prospects for our return to prosperity. We have had the opportunity over the past year to listen to many speeches from Presidents to heads of Treasury and the Federal Reserve. Many men and women – bright men and women, have weighed in and opined on our current situation. They’ve spoken of stimulus, of consumer spending, government spending, bridges, roads, healthcare, energy, banks, and many other topics too numerous to count in this short space. However, what I haven’t heard nearly enough mention of is confidence even though the stated purpose and intent of these speeches has been to inspire the same.

The confidence of consumers

One report in particular has made some inroads in terms of getting coverage of the precipitous drop in overall consumer confidence. And in fact, the most recent release of the Conference Board’s measurement of consumer confidence was the worst in history since measurements began more than 40 years ago. Perhaps the worst part of this report was the expectations component, which absolutely fell off a cliff, plunging from a level of 42.5 to a 27.5 level. The jobs component of the report was no better. 47.3% of those surveyed expect there to be fewer jobs in the future with a mere 7.1% expecting more jobs. 4.4% thought jobs are easy get with nearly half (47.8%) opining that jobs are very hard to get. The chart below tells the awful story.

It is fairly easy to see how the lack of confidence has translated into overall drops in retail sales. Sure people are spending less for gasoline (a major component of retail sales) than they were a year ago, but they certainly aren’t buying anything else in its place either.

This situation, however, goes way beyond some numbers reported every month. It goes to the very heart of the opening paragraph. Confidence is the key to a successful economy, particularly ours, which is so heavily dependent on the consumer taking on debt and spending money. In order to perpetuate this dynamic, the consumer needs to have utmost confidence. As last 2008’s failed stimulus package demonstrates, simply handing money to consumers who are not confident will result in the money being saved or used to pay off existing bills. No confidence, no spending. It’s as simple as that.

Collapse of retirement contributions a referendum on confidence in the financial system

Whether it is along with, beside, or because of consumer’s confidence, equity markets on a global scale have crashed in grand form over the past year. Sure, not all of that was caused by the little guy selling his 401(k)/IRA and going to cash. It is our opinion that the little guy actually represents a relatively small component of the overall money invested in the markets when leverage is factored in. However, the little guy’s actions have still had major ramifications. Consider the following:

• 529 plan contributions are down an average of 60% from 2007 according to a 529 plan representative who materialized at my office door a few weeks ago

• According to TD Ameritrade, 63% of people with retirement plans stopped contributing to them in 2008

• Only 21% of individuals surveyed in the above study had more than $50,000 in investable savings

• Unemployment (32%) and increases in health care premiums (25) were the leading reasons why people stopped contributing to retirement plans in 2008

• Nearly 25% of survey respondents in the 35-44 age group said they’d completely stopped contributing to retirement accounts in 2008. This more than any other group

While complete data for 2008 contributions is incomplete due to the fact that 4/15/09 is the deadline for 2008 IRA contributions, it is relatively clear that 2008 contributions will be down significantly. This problem is two-fold. The first is many people don’t have the funds to invest. The second is that they have lost confidence in the markets and their ability to protect (let alone grow) capital. This reality is unfolding at an unprecedented time in history – a time when people can least afford to be caught without savings.

Job loss – the ultimate confidence-killer

As now more than 600,000 Americans each week are realizing, the loss of a job is one of the most stressful events one can endure. There is an old adage that it is a recession when your neighbor loses his job, but it is a depression when you lose yours. This is not meant to trivialize the matter of unemployment in the least, but rather to underscore the effect that the loss of one’s livelihood has on confidence. As can be expected, consumer confidence has plunged as job losses continue to increase.

Next Friday’s unemployment report is likely to feature an unemployment rate well north of 8% not counting the thousands of workers who lost their jobs in late 2007 and early 2008 that have now fallen off the unemployment rolls and as such are no longer counted. By our count, there have been nearly 2.4 million first time claims for unemployment in the past 4 weeks alone and the trend shows no signs of slowing, at least not in the short term. While unemployment insurance lasts up to a year (depending on the state), it only covers a portion of lost earnings. A good average is probably around 60%. I don’t know about you, but I don’t know too many people who can maintain their current standard of living on 60% of their income – or are even willing to try.

Money – A True Crisis of Confidence

Confidence in the monetary system of the United States has been a true lagging indicator. Inflation at a rate of 5% or so per year has been institutionalized in the system for as long as anyone can remember. Keynesian economics teaches us that this inflation is a normal by-product of growth and should be accepted with glee, which is absolute nonsense. This is akin to welcoming a burglar into your home and offering him 5% of your belongings then chalking it up as a cost of living.

However, even the most regular of folks are starting to wonder where the trillions of dollars for their retirements, healthcare, financial system bailouts, various industry bailouts, state bailouts, government spending, and other pet political projects are going to come from. The fact is we’ve crossed the Rubicon in this regard. The world no longer creates enough savings to cover our massive balance of payments and fiscal deficits. And remember, one in three Americans have less than $50,000 in savings to deal with this. Everyday Americans are starting to wake up to the reality that this money doesn’t exist and must be created from nothing. That certainly doesn’t bode well for their confidence in the value of the currency they carry in their pockets. It can no longer be called money, because to call it money is to imply that it is a store of wealth and acts as a standard unit of exchange.

A real store of wealth holds its value and maintains purchasing power. The US dollar has lost around 96% of its purchasing power since the Fed was created in 1913. Other paper currencies are not far behind. This reality has driven record demand for gold and silver coins as the public awakens and attempts to diversify out of paper. This overall loss in confidence in paper assets is what drives mainstream columnists to attack gold as a ‘useless rock’ and float the false notion that people who bought stock after the 1929 crash got their money back in a few years when in fact it took a few decades. Remember, it is all about confidence.

In the end, the financial crisis of 2007-? will be summed up as a fairly simple process:

1) Confidence shaken

2) More debt accumulated to maintain confidence

3) Confidence further shaken

3) Even more debt accumulated

4) Confidence lost because of all the debt accumulated

For in fact during the early stages of the crisis, policymakers and pundits alike were busy talking about strong economic fundamentals and failing to address the root causes of the problem when it might have mattered. For nearly 9 months the current depression brewed before Fed head Bernanke and Treasury Secy. Paulson were even willing to admit that a problem existed outside the banking system. The entire sum total of their efforts was to maintain confidence. It was a dangerous gamble that has proven disastrous and they’re about to learn the hard way that while you might be able to create a bailout for big banks and big government, there is no bailout for confidence.

Don’t miss out on your free copy of our report “The 7 Mistakes Investors make..and how to avoid them”. Get your copy today by going to our website www.suttonfinance.net and clicking the free report banner.

Disclosures: Long GDX