Can Bernanke Fix the Economy?

GDP is up, but debt is up even more. It is a borrowed recovery. The idea that the government can fix the economy is a myth. Social mood directs the markets, economy, politics. Government intervention only makes things worse. FDIC, FED, Fannie, Freddie are the cause of our problems. Free markets, small government, less tax is the way to go. The government does not have the vision for economic progress. They only make impossible promisses and when things go south, they demand bailout at tax payer expense.

The government should have stopped messing with the economy long time ago. Their so called good intentions cause the crash. FED has been inflating the money supply (bank credit) for the last 50 years. It exploded exponentially, much faster than the GDP. In other words, as every day passes by, it takes more and more borrowed money to create $1 increase in GDP. This is because the real economy is shrinking and wall street, finance, and other non-productive sectors are expanding.

We need financial instutions just like an engine needs oil. But look what happened: At the top of the housing boom, the number of realtors was more than the number of factory workers in the US. This is the financial mania mentality where people think they will all get rich without creating something. Not only that, this shows the sad state of the population where they don't have the capacity to create something and sell.

Where does that leave us? It leaves us at the top of the rally that was right before the real crash in Great Depression:

http://www.tradingstocks.net/html/2010_stock_market_forecast.html

We cannot borrow and recover. Borrowing is the cause of the problem. More borrowing will not solve it. I wish the Keynesians would understand common sense economics. Consumer economy is a myth. It is a way to put the American public to sleep while the multinational corporations pillage and plunder their wealth until there is nothing left.

Why is government not doing anything? Well, government works for the capitalist elite. Nobody else. Don't believe it when government says they want to help the home owners. Homeowners are the banks. When government talks about Affordable Housing, it really means they want higher home prices so that people can take bigger mortgages and be the slaves of the banks for their entire life.

Why does the government do this?? Because when we borrow, banks create money. This new money makes it easy to earn and makes the government look good. Banks don't lend existing money. This is why Obama is telling the banks to lend. Almost all of our money supply is created this way. It is bank credit. When we borrowed we created the principal. Now the banks want us to pay back principal + interest. The interest is not even created yet. So if the borrowing stops, the economy stops:

http://www.tradingstocks.net/html/jaguar_inflation.html

To delay the inevitable, the government allowed the banks to give sub-prime mortgages so that a new portion of the population could borrow and money would be created. No 20% down. Liar loans... Constant increase in money supply would make the government look good, and it would give the impression that they managed the economy well. This is how banks create money out of thin air:

http://www.tradingstocks.net/html/banks_create_money.html

This tendency has accelerated since Reagan. Thus the stock market bubble of 1980s and 1990s. Now they ran out of people to lend money to. Thus the music stops. The bubbles pop one after the other. The debt is all time high and the real economy is not able to carry the weight anymore:

http://www.tradingstocks.net/html/inflation_deflation_credit_bub.html

We have borrowed from the future. When the future arrives, it will be paid back one way or another. There is no free lunch. People say we will print money and pay. Printing money only changes who pays for it. In a global economy, it does not matter who pays, it will cause the crash.

The cause is in place. The effect will follow. FED already made the mistake of inflating the credit bubble. When it deflates, economy will crash. It cannot be avoided.

Stay Away From Bond Market!

I keep hearing how high the bond market is flying. This is typical of a top. It makes the news now. But the time to buy the bonds was long ago when they were crushed and nobody wanted to hear about them.

Bonds are a bubble! US dollar is the place to be for the next 1-2 years. Not stocks. Not bonds. US dollar rally is real. 2008 was just the warm up in this deflationary crash. FED printed a trillion and inflation is nowhere to be seen! Do you know why? Let me explain.
Our money supply is NOT printed dollars. It is bank credit. We printed 2 trillion dollars. But we borrowed 50 to 300 trillion over many decades. This debt becomes our money supply. And it needs to be paid back with interest! Banks create money when we borrow:

http://www.tradingstocks.net/html/banks_create_money.html

At a given time principal+ interest does not exist. It will only exist with more borrowing, so that people can earn and pay it back. When the borrowing slows down, it becomes hard to find US dollars to pay back the debt. That is why when the economy goes down, US dollar rallies and everything else falls, including Gold.

We are at the early stages of a deflationary crash. The debt levels in the society are too high. This is why starting with 2006 housing top, economy started to come down. We ran out of borrowers! Thus we were not able to inflate the money supply as needed!

http://www.tradingstocks.net/html/inflation_deflation_credit_bub.html

Sub-prime was intentional. No 20% down. Uncle sam wants you to borrow the full amount! Liar loans were OK, as long as you borrowed, all was fair! And then the music stopped. Now they pay you 8K home buyer credit so that you may borrow!

http://www.tradingstocks.net/html/housing_market_bubble_bust_cyc.html

The crash will go into history books. We are in Kondratieff Winter. The debt is the problem. Debt is denominated in US dollars, not Gold! To pay debt, people must find US dollars. Gold is not in a bull market either:

http://www.tradingstocks.net/html/gold_bull_or_bubble.html

US state and local governments are going bust. They are cutting jobs. Banks are kept alive at tax payer expense. Fannie, Freddie loosing billions, may reach a trillion, just so that cheap mortgage is available so that banks can sell their over prices homes to the home buyers. Stay away from bonds. Bonds are a bubble.

http://www.tradingstocks.net/html/investors_jump_into_fire.html

This is going to be a single dip depression. Stock market has head and shoulders pattern. 2000 is left shoulder, 2007 is head, 2010 is right shoulder. Stocks can go down lower than you can imagine. Get out while you can. Nothing has been fixed. We have borrowed and spent on consumer debt. We are not increasing our productive capacity or competitive edge. Borrowing from China to consume more Chinese products is not going to be a recovery. This is a dead end.

http://www.tradingstocks.net/html/latest_opinion.html

Cash is the place to be for a while. Soon your USD will buy more stocks, more homes, more oil, more gold. Deflationary crash is coming.

Home Sales Down Despite Tax Credits

Recent Yahoo Finance article shows home sales are down despite the tax credits that were offered to home buyers.

http://finance.yahoo.com/news/May-home-sales-dip-as-housing-apf-1632613040.html?x=0&sec=topStories&pos=2&asset=&ccode=

This is another example of how government programs that are designed to create false demand fail. Why does the government run this desperate program?

Uncle Sam wants YOU to buy a house! And an expensive one! Seriously. That is the only game in town. Let me explain why.

When we borrow money, banks create brand new money. They do not lend existing money. Here is how banks create money:

http://www.tradingstocks.net/html/banks_create_money.html

This is called credit inflation. FED has been inflating credit for the last 50 years faster than GDP growth. This extra money in the economy makes it easier to earn it. People feel good. They forget that entire money supply is borrowed bank credit that needs to be paid back someday with interest!

This flood of money makes the current administration look good. Remember all the talk about "Affordable Housing"? And right after the government promised American dream come true, they made mortgage easy, and propelled the home prices. That is not really affordable housing. Now finally the home prices are coming down, and instead of celebrating that home prices are affordable they are trying to propel them up again. This is because uncle sam wants you to borrow money so that banks create money! As simple as that. The more you borrow, the better it is. This is the only tool that the government has to make it look like they are doing good. Here is how the government uses home prices and easy mortgage to inflate the money supply:

http://www.tradingstocks.net/html/housing_market_bubble_bust_cyc.html

Expensive is NOT good. Stocks should be cheap. Why would you want to own something that does not pay a dividend? Homes should be cheap. Why would you want an expensive house? Until these things get cheap, we are NOT going to be wealthy. If people are not able to afford a home, then higher prices are not good.

Anyway, now you get the idea. This is why government subsidizes mortgages with interest deduction from income. That is a direct wealth transfer from renters / owners to the banks and makes it more attractive to buy expensive homes so that people borrow big, banks create money and inject it into the economy. That is why cash for clunkers. So that you borrow and buy a car. That is why 8K first time home buyer credit. Sounds like a good plan, right? Well, there is a limit to how much people can borrow. When the entire population reaches it's natural limit, the bust arrives and the same process reverses itself, and it is called deflation:

http://www.tradingstocks.net/html/inflation_deflation_credit_bub.html

How to Identify a Stock Market Top

Today a financial article made the claim that market timing is not possible and the performance of your portfolio depends on luck:

http://finance.yahoo.com/news/One-Big-Thing-We-Dont-Know-nytimes-2119843318.html?x=0&sec=topStories&pos=6&asset=&ccode=

The article correctly mentions that there are very long (20-40 years) periods where stocks do not perform as good as bonds. This information is largely ignored by the mainstream media who likes to present the buy and hold case for stocks.

There are various technical analysis tools that makes it possible to measure the maturity of a rally or a decline so that you may line up the ods in your favor. Buy and Hold definately does not work and it is displayed by example in this decade and in many decades in the past.

It is possible to identify the market trend via simple tools like moving averages. It is possible to identify a tiring market via advance decline ratios. We can suspect a pending crash when we see accumulation-distribution index declining while stocks are advancing. We have successfully used this many times in our latest stock market forcast service:

http://www.tradingstocks.net/html/latest_opinion.html

Daily sentiment index works as a contratrian indicator. For example back in March 2009, only 3% of traders were bullish and that was a bottom. Fast forward to April 2010, we had 92% of traders bullish on S&P 500 and that made us suspect a stock market top. Here are many other technical indicators that scream when stars are lined up to signal a market top:

http://www.tradingstocks.net/html/spot_stock_market_top.html

It is true that there is nothing certain about financial markets. But it is not purely luck. You can use technical analysis to turn the ods in your favor. Markets are probabilistic and if you know what is more likely you can allocate your protfolio accordingly and perform much better than random trades.

Austerity Measures and Deflation

Deflationary crash continues. As we hear more and more austerity action, we will see less and less spending and as debt deflates, money supply will continue to shrink. UK, other European nations, many US states and local governments are going to cut spending and start saving:

http://www.marketwatch.com/story/uk-plans-59-billion-of-spending-cuts-new-taxes-2010-06-22

This trend of austerity is deflationary. Here is what else is deflationary in the current economic environment:

http://www.tradingstocks.net/html/signs_of_deflation.html

In the past economy seemed to be doing OK solely due to credit inflation that FED and other central banks have fostered. FED made it easy to borrow. The world borrowed and spent. When we borrow money, banks create new money and give it to us. They do not lend existing money. Here is how banks create money.

http://www.tradingstocks.net/html/banks_create_money.html

This new money expands the money supply. It makes it easy to earn. Our economy is now addicted to the ever expanding credit supply. For decades, our total debt (not federal debt, but the debt people owe) increased faster than the GDP. For every unit of GDP increase, we had to borrow more and more every year.

Why does it matter? Well, all of our money supply is bank credit. It is borrowed money. It needs to be paid back as principal + interest. The interest portion is not even created yet. Borrowing MUST increase exponentially so that principal+interest amount exists in the economy so that people can earn it and pay back what they owe. What happens when borrowing stops? Deflationary crash occurs. Debt problem:

http://www.tradingstocks.net/html/inflation_deflation_credit_bub.html

There is a limit to how much people can borrow. To make it last what did they do? They allowed people to deduct mortgage interest from income while calculating tax. That made mortgage more attractive. So people borrowed more and injected new money into the economy. This new money makes the current administration look good. In fact, they guarantee a future bankruptcy but who cares. As long as they get re-elected...

http://www.tradingstocks.net/html/housing_market_bubble_bust_cyc.html

Government talked about the American Dream and Affordable Housing. Now home prices are becoming affordable, but instead of celebrating, they are scared to death, they are trying to inflate prices again. Home prices are down, sales volume is down. After prime borrowers were exhausted, they changed the rules to allow sub-prime borrowers get big mortgages. No 20% down, liar loans were all to inflate total credit. Now sub-prime is exhausted and the crash has started. 8K tax credit won't work. Home prices must increase exponentially to sustain a recovery. People must borrow HUGE amounts to provide new money to the economy. Who is gonna do that??? Here is why FED's easy money policy does not work beyond some point:

http://www.tradingstocks.net/html/jaguar_inflation.html

Where does that leave us? It leaves us at the top of the greatest bubble ever! What ever you do, make sure you do not take on more debt! Pay off existing debt! If you have existing savings in cash or cash equivalents such as short term US treasuries you should be fine for a few years. At the bottom of depression you may have to jump out of US dollars if FED freaks out and really prints money!

All of the prices, and salaries you see around you were based on inflated credit that happened over 50 years. It is based on a money supply that is almost entirely bank credit. People borrowed and borrowed and spent. The amount of money borrowed reached sky high. You earned in good times! Now, it is reversing course!

Deflation is here! Understand the economic environment we are in:

http://www.tradingstocks.net/html/prepare_for_market_crash.html

Austerity measures are the harbinger of the tidal wave that will wipe us out. Deflationary crash is not over. 2008 was just the warm up. Japan had it for 20 years. Do not think we are immune.

Where did all the wealth go?

Came across this article, that talks about the phony wealth of 11 trillion dollars that dissapeared in the crash so far:

http://finance.yahoo.com/news/Where-All-That-Money-nytimes-173741017.html?x=0&sec=topStories&pos=7&asset=&ccode=

People often have difficulty to understand where the money goes when the stock market collapses, and when housing market collapses. For example, when DOW is at 14,000 Mary looks at her stock protfolio that is worth at 140,000 dollars. She assumes she has that much money.

The problem is that she does not have that money. She will only have the money when she sells at DOW 14,000.

Similarly, when a bank gives out a home equity loan, they look at comparable home values to decide what a single home is worth. They then give out a loan based on that number.

What is the problem with this? The problem is that these valuations maybe correct when done in small scale. But at aggregate, when an entire population decides to sell their stocks, or homes at that price, they won't get such price. Price will decline.

That is why stocks are a bubble and home prices have not bottomed.

Is it a good time to buy a home?

Article explains why it is a great time to buy a home:

http://www.msnbc.msn.com/id/36650111/ns/business-real_estate/

This is a great time to buy if we only look at the past few years of bubble. But hey, look at history. There were times when declining home prices have lasted for decades. People have the tendency to say it won't happen again. We will see.

Let us examine the claims made in the article:

"In addition, as first-time buyers, they can qualify for a federal tax credit of up to $8,000 and up to another $10,000 in California state tax credits."

Looks like prices are kept up by subsidy. What will happen when the support dissapears? Or what will happen when we run out of potential buyers as we ran out of borrowers during sub-prime?? Mortgage rates are at historic lows. What will happen when rates go up?

"There are also significant tax benefits, including capital gains deductions for property taxes and loan interest."

If your loan is 150K, I am not sure how big the tax benefit is. Standard deduction for a couple is quite big. If your loan is much higher, than you must be making a lot of money and you may hit AMT.

"A home appreciates in the long run and acts as a hedge against inflation."

And it kills you in deflation. Signs of deflation:

http://www.tradingstocks.net/html/signs_of_deflation.html

"It helps diversify your assets, builds equity and provides a means of forced savings as you slowly pay down the principal."

Diversification is dangerous during deflation. Home purchase is a long term decision. If you plan to hold for 20 years, can you get out on time before deflation hits? Or will you end up riding the tidal wave till prices hit the bottom? A liquid position is much easier to protect.

10 things you should and should not do during deflation:

http://www.tradingstocks.net/html/ten_things.html

"Real estate also is a leveraged investment, unlike most others. If you put 10 percent or $20,000 down on a $200,000 house and it appreciates to $300,000, that translates to a 500 percent return."

Leveraged long bets will wipe you out if deflation hits. It is better to buy what you can afford even if deflation hits. Mortgage rates have one way to go: UP. Who can afford these homes at higher rates? Higher rates will put pressure on prices. Price appreciation is not a sure thing even if CPI goes up. Salaries and home prices can stagnate while CPI moves up (Due to more expensive imports). That will wipe out the housing market.

"Of course, this won't last forever."

There are long periods in history when stock, home prices stagnate or fall. Inflation in US was not due to money printing. It was due to credit inflation. Money supply can deflate. Here is why:

http://www.tradingstocks.net/html/inflation_deflation_credit_bub.html

According to Case-Shiller index, we are still 20% above long term average prices. These long term averages themselves are based on an inflated money supply. Typical bottom comes 20% below average. That is a 40% drop from here. It can happen. Why pay more to take this risk?

If you have alot of money, then buy cash down and then you will save on rent. A little. Your savings will compensate some of your losses if the money supply deflates.