Bernanke is Printing Money But...

For the last few weeks, US dollar is up despite Bernanke's printing press. The US dollar bottom came the day Bernanke said he would print print print relentlessly. Treasury rates are sky rocketing and mortgage rates are up as well. So, what happened? Didn't Bernanke make it clear he wants lower mortgage rates to save the housing market?

The problems are too big to solve. This is a deflationary crash. US dollar rally is real. Bernanke is printing money and the dollar is going up. This is the problem Bernanke is facing. Credit can deflate faster than he can print! Money is not what Bernanke prints! Money is what we borrow. How often do you use cash to buy things? We use our checkbooks, our credit cards. They represent our bank account. And what are bank accounts? Bank accounts are not cash. They are only promises to pay from the bank to you. They are IOUs. There is no real cash backing them due to fractional reserve banking and this is part of our problem.

Bernanke's real job is to facilitate credit. The job of Federal Reserve Bank is not to just print money. It makes credit available. However, due to earlier optimism, we have already borrow for decades. Doing so we have created our money supply. Then we ran out of credit worthy borrowers. Now the banks expect us to pay back with interest. So, let us see where we are. Total money supply is X. It needs to be paid back with interest. So the debt is X+I. Without further borrowing, how will that happen? The aswer is, it won't. This is why Bernanke is printing the shortfall in money supply and inflation is not happening. However, this comes at a price. If creditors are afraid that Bernanke will keep printing, then they will refuse to lend money at low rates. This will be deflationary for credit markets. If you cannot borrow mortgage at low rates, you can't buy the same house. Prices will have to come down. This can kick off a deflationary downward spiral in housing and other credit dependent sectors of the economy. Bernanke is between two rocks.

Most of the world's debt is denominated in US dollars. Borrowers must find US dollars to pay. They will sell everything, stocks, bonds, houses, gold, oil... If they don't, their creditors will! Keep your dollars safe! Do not get into excessive debt. It will be worth it. At the bottom of the deflationary collapse, your dollars will buy more of everything.

Will Bernanke Save the Economy?

Economy is going down the drain, FED feels the need for more stimulus, but the market rallies. Does that sound irrational? Yes. People do this all the time. Look how throughout the 2007-2009 crash FED came up with more and more stimulus and how the market declined after brief rallies:

http://www.kondratieffwavecycle.com/stock-market/is-the-plunge-protection-team-manipulating-stocks/

Now deficit is more than a trillion. Unemployment is at record high levels. We are merely borrowing and spending to sustain our consumer economy illusion. Yet the traders are optimistic about the economy. Everybody bought the stocks, 93% of traders are bullish. They are all waiting for stocks to go ever higher so that they can sell to the greater fool. Just wait it out folks, one of these days those bulls will end up being the greater fool who bought at the top. Everybody knows FED will save the economy, can they all be right?

Stock market technical indicators once again are ringing the bells. Weekly and daily accumulation distribution index is showing big money is selling the rally, not buying it. Other technical indicators that we should mention are:

1. Mutual Funds Cash Holdings
2. Annual Dividend Yield and P/E Ratio
3. Daily Sentiment Index
4. American Association of Individual Investors (AAII) Poll
5. Bull-Bear Spread
6. Put/Call Ratios and
7. VIX
8. Intraday Trading Index (TRIN)
9.-13. Momentum Indicators: TICK, Closing Premium, Upward Gaps, Open TRIN, Volume

Excessive optimisim is visible accross the board. Democrats are about to loose (which the traders already know), Bernanke keeps promising Quantiative Easing 2 (QE2) which the traders also know. US dollar is wiped out and according to the press it is dead. Never mind, in early summer it was the Euro that was declared dead. Press was calling 1 to 1 parity for Euro/USD and some were calling European Union would break apart. Now, few months later we see the exactly opposite sentiment in currencies, gold and silver. People are bullish on everything except the US dollar.

They say you need to be in stocks or inflation will wipe out your money. Burned investors jumped into junk bonds and are about to get burned even worse on that side. Gold is supposed to go to 10,000 USD. Silver, commodities is supposed to skyrocket as well.

But there is one thing wrong in this picture. Stocks, bonds, oil, gold, everything is going up, but unemployment is still high. Real Estate prices, despite record stimulus and gigantic Fannie Mae, Freddie Mac losses, are in a decline. Salaries are not going up. GDP is up, but debt is up exponentially more.

We are spending borrowed money and propping up prices of speculative assets such as stocks, bonds, gold, silver and shorting the dollar. But the day of reckoning is near. US dollar will soon bottom. US dollar is the place to be. Debt is the problem and we have more of it now. Bernanke has alot more printing to do. Meanwhile, DOW priced in Gold is crashing, and nominal prices will soon follow.

Executive Compensation

Lately, excessive executive compensation is attracting attention. Various sources are reporting that executive compensation in the “new economy” is reaching levels unseen before. Avarage executive pay is hundreds of times of avarage employee pay. This is orders of magnitudes higher than how it used to be. Are we jealous? Yes. Should we stop this practice of excessive pay for the executives? Yes. But the reason we should do so is not based on our emotions of envy. It is based on the necessity that I will explain now.

Currently, a CEO’s success is evaluated based on the money his company earns during his service time. He comes into power, company makes billions, he takes his salary, bonus, cashes options and walks away. Next year the company may go bankrupt. But why would he care? We have seen this game play out time and again, especially in the financial sector where two years ago avarage employee bonus was 600,000 USD. And a NYC restaurant was boasting about wine sales to Wall Street types for 30,000 USD a bottle. Now some of those employees are laid off and their companies are on life support. What was the purpose of paying these people -who run their companies a ground- that much money? The CEO and employees who cashout a lifetime of pay check in a year do not have the incentive to make the right decisions for the long run. They cannot bite the bullet and say no to sin if they have to forfeit short term profits. The shareholders must reign in and force them to do so. For that to happen, the government needs to stop bailing out these companies so that share holders get punished for their utter lack of care over what company they invest in. Otherwise indifference will continue and the good and the bad will not be sorted out. We must let the free markets work without government intervention so that the truth shall prevail and we can follow the truth instead of the desire of our hearts.

Let us say the share holders woke up and want to do something. What can they do? They can do the following:

1. Cap executive salary at 4, 5 times the avarage employee salary.

2. Provide attractively priced stock options that will vest (regardless of whether the executive is still in the office or not) in the next 20 years as part of the total benefits.

This way executives can still get good pay over the long run if their companies perform well which makes their options worth more. And they will have some incentive to make long term decisions because their pay depends on it.

If the government wants to interfere with the markets, it should add the following:

1. Do not tax dividends.

2. Tax capital gains at a prohibitive rate such as 80%.

This will have the following effects:

1. Encourage the companies to pay dividends as a way to pay the shareholders.

2. Remove the hope of getting rich through speculation of higher and higher prices that cause bubbles.

It is not success to merely paint a positive picture to propell the stock price higher so that shareholders are happy and the executive can get his pay. Propelling prices based on hopes and wishes is a lie and it is almost criminal.

If a business is sucessful, it should be able to generate cash and pay dividends. Why should I have to sell my company to make money? I should be able to own it and make money through dividends.

Currently, the WALL Street is nothing more than a casino. Those who get out at the right time will run away with the money. Others who do not have time to study and time the market will be left behind as usual. Some compare this great recession to the deflationary crash of great depression. Pension plans, 401Ks, individual savings are all invested in stocks or risky bonds. A decline can wipe out huge amount of wealth that we think we have.

Many people’s retirement is at stake and it is sad to see few are aware that they are gambling it away. There are sharks who trade these markets at the 401k accounts’ expense and they will certainly benefit from this indifference and run away with the money. Executive pay plays a role in the true valuation of these companies and we need to fix it for an honest financial market.

Fractional Reserve Banking is the Cause of the Crash

The problem is not with democrats or republicans. They are both the same. Government intervention into the free markets in the form of FED, FDIC, Fannie, Freddie is the cause of our problems. So, why did the government create them? Let me explain the whole adventure shortly.

In the past economy seemed to be doing OK solely due to credit inflation that FED has fostered. FED made it easy to borrow. America 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. People are happy to have a job, they do not save, consumer economy myth encourages them to spend, thus they do not care that there is inflation. When it is time to buy a home, they happy to promise their lifetime earnings to a bank who creates money out of thin air by making false promises that it never intends to keep. Slavery of the masses is another matter to be discussed in another post.

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. This is the system bankers have created to ensure that more and more of us are in debt. They created the FED so that in a time of inevitable bust like this, FED can save the banks while average Joe goes bankrupt and looses his home to the bank. Why does ordinary Joe is guaranteed to go bankrupt and loose his home to the bank?? Let me explain that too.

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. They want the housing bubble back. 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: Jaguar Inflation

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! Deflationary crash is here!

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

Even though at an individual level borrowing with interest may seem fair, at macro-economic level, interest based monetary system is guaranteed to fail. What is worse is that the bankers who run this country made sure that the government agreed to bail them out at tax payer expense.

The fix is to get the banks out of money creation business. Nationalize banks that fail. Abolish the FED. Let the treasury print it's own money. Entire America should not be a slave of bankers paying interest for the money that they create out of nothing.

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.

Stocks Are a Zero Sum Game

Stock market is a zero sum as long as stocks don't pay dividend. Participants are placing bets against each other. For example, if total money supply is 50 trillion, and we decide to invest all of this money in stocks, the market will go up. We will marvel at how high the stocks are. And when we sell them all to get our money back, we are going to get back exactly 50 trillion. But it will be redistributed between participants. Some will get more than they put in, some will get less. Not a penny more or less. Stocks are the place to be when the money supply is inflating, not when it is deflating.

Many baby boomers have stocks. When they need to sell, they need to find buyers. Given that the population's worker/retiree ratio is changing with more and more people retiring, the numbers of buyers will fall short. There won't be enough demand. Thus when an entire generation of boomers are selling, they are not going to get the prices they hope for.

We can demonstrate this with a simplified example.

Mary has 10K in the stock market (or let's say she has a restaurant). Joe has none. Adam has none. Joe offers to buy it for 10K because he thinks the restaurant will do well, Mary sells. Favorable things happen and Adam thinks he wants to buy the restaurant for 20K from Joe. Joe sells. Then things do not go as good as Adam hoped. He agrees to sell it to Mary for 10K.

At the end, stocks are priced at 10K only because people agreed on it. As they went up to 20K and then down to 10K, stocks did not generate new money. Only people agreed to buy sell them at different valuations and they used their existing money supply.

At the end Mary did not loose or gain. Joe gained 10K. Adam lost 10K.

DOW can trade at 20K tomorrow and it is not going to make a difference on how much money our economy has. It is not going make a recovery. It is not going to make it easier to have a job. It is not going to help us import stuff and enjoy a better life style. This is because when it is at 20K, 1 American will sell at that price and will feel rich, and 1 American will buy at that price and will hope to get richer. But at aggregate level, the gain on total economy is zero. Only Adam paid to Joe. Total money of Adam+Joe remains the same no matter what the stock price is.

So, are we at 10K or are we at 20K valuations now? Is it time to buy stocks? Here is the big picture:

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

How Free Markets Sank the US Economy

Here is a good article that describes how we got into this mess:

http://finance.yahoo.com/news/How-free-markets-sank-the-US-rb-3640236057.html

The true cause of the crash is not the free markets. The true cause is decades of government intervention in the form of FDIC, FED, Fannie Mae, Ginnie Mae and other government programs coupled with a bankrupt monetary system that demands usury and uses fractional reserve banking.

Here how banks create money out of thin air, and along the process create a debt bubble that is impossible to pay back and certain to cause a deflationary crash:

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

What about FDIC? FDIC is a broke corporation that cannot possibly guarantee all deposits. Yet they claim to do so. This claim blinds the depositors and removes any worry about their banks. This mentality is the cause of the collapse of the banking system.

If the bank deposits were not insured, then depositors would questions the bank actions. Banks would not get too big to fail while at the same time take excessive risk. Depositors worry would keep a check on bankers' greed. There would be a whole new breed of banks who just keep your money safe, with minimal or no risk and not pay interest at all.

But due to FDIC, people threw caution to the wind, and nobody questioned the bank. They blindly deposited their money thinking that FDIC guarantees it. Now FDIC is broke:

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

Thus a government intervention in the form of FDIC ends up causing the exact opposite of it's intended result. Now the banks are bankrupt, they are insolvent due to their risky bets and the tax payer has to clean it up. Here is a free 13 page report that details the problem with the banks and their wrong portfolio decisions that lasted decades:

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

What about FED? FED made credit easy, and America borrowed from the future. FED's easy money policy gives the wrong signal to the markets. Interest rates should be left to the markets. FED claims that it regulates the markets. But if we look at 20th century, we had a more volatile economy and stock market compared to 19th century when the FED did not exist! Real growth during 19th century was higher compared to 20th century. So what did FED really do?

In 19th century, we had periods where we had beneficial deflation. As productivity was increased, goods and services became cheaper. But FED openly says they want 2% inflation. This makes it easier to borrow (so that you can pay back with inflated dollars). People cannot save to buy a home, savings are reduced and spending is increased. This is not a healthy system. But FED wants this in order to channel wealth to the bankers. Without inflation, people would have the option to save and bankers would get a smaller share of the wealth with their usury.

What other harm does this FED policy of easy money do? As debt inflates, it becomes a monster that has to feed on itself. To pay old debt, new debt must increase exponentially. Otherwise, money supply, which is credit, is not enough to pay existing principal + interest. Here it is:

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

FED is a government intervention into the free market rates. Without FED, as the debt bubble grew, rates would go up and it would provide an automatic check on further debt expansion. Debt would deflate quickly to sustainable levels with frequent deflations, thus we would have smaller recessions instead of huge bubbles and depressions that follow them.

Now that FED has messed with the economy for decades, instead of another recession, we have to go through a major depression for the mess to be cleaned and debt to deflate to a sustainable multiple of GDP.

All of this is the result of government intervention. We need small government, and free markets. We don't have that.

Why we cannot monetize debt?

Here is an article that explains why the US cannot inflate its way out of debt:

http://money.cnn.com/2010/03/10/news/economy/inflation_debt/index.htm

It mentions valid reasons such as government obligations that go up with inflation. But it does not tell the simple truth:

We cannot monetize debt, because it is dishonest to do so.

Who would want to lend money in US dollars if they know they may get back worthless dollars? Once the credibility of the US dollars dissapears, it stops functioning as a reserve currency. People will not hold it for the long term. Similarly, they will not lend money in US dollars for the long term. What will that do?

Long term treasuries will cease to exist! US government will not be able to borrow in US dollars. This will drive up the cost of borrowing. We will have to pay higher real interest rates.

Credit dependent sectors such as housing will take a hit because lenders will not lend money for 30 years or 15 years. Mortgage rates will go sky high. This will have immediate deflationary effects on home prices. After the prices fall, they will NOT go up with inflation until they are low enough for cash down purchases. Once it becomes a cash market, bankers will be out of the loop. That is not what the FED wants. FED wants American's to be the slave of their mortgage for 30 years, practically a lifetime so that we work to sustain the lifestyle of bankers who create money out of thin air and give it to us:

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

This is why FED's main role has been to make credit expansion easy. The try to create the conditions where credit markets function properly. Inflating debt by the printing press at excessive levels goes against this goal.

Make no mistake, FED is printing money as seen in St. Louis FED charts:

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

But this printed money supply barely compensates for the deflating credit that is again shown in charts in above link, at least for now inflation is in check.

There is also the FED's motive to keep bankers strong. They have given them much financial support. As the rest of the population goes bankrupt, unemployed, wall street is enjoying record bonus. How is this related to debt monetaziation? Here is how:

If FED prints too much money, then the value of credit expanded (the value of the money supply) will fall. Currently, the financial sector is getting record high portion of this money supply. If it's value falls, they will be the ones that will be hit hardest! That is why FED only inflates in favor of financial sector but not more than that. FED is fine with tax payer working a lifetime and paying high taxes that are used to save their bankers.

In other words, bankers are happy to get tax payer money during a deflationary crash! They are getting richer. Why would they want it to be changed? We will only monetize bankers' debt. Not your mortgage or mine.

Robber Barons? Or Real Money - Gold

I read this article that talks about the golden age of Robber Barons: American industrial age from 1861 to 1901.

http://finance.yahoo.com/taxes/article/108963/bring-back-the-robber-barons

The article suggests that the market entrepreneurs find ways to create jobs that others, particularly politicians do not see.

1861 to 1901 was remarkable for something else. We had a sound money system that was based on gold. Entire world used gold, a relatively honest monetary system. If we look at the 19th century stock market charts, we see that the fluctuations measured in real money are less. The market seems to be more stable.

FED was created in 1913. After the FED was created, we had violent fluctuations in the markets. Great Depression era, 1929 to 1940s was huge fluctuation, down and up. Similarly 1970s, when measured in real money was a huge decline in stock prices, as bad as Great Depression. And since 1999, Gold-DOW has lost more than 80% and is becoming as bad as Great Depression. Here is Gold-DOW chart:

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

During 1861 to 1901 period, we had beneficial price deflation because as productivity increased, price of goods and services have fallen where as life style has improved. This is the opposite of what we are having now. FED targets 2% inflation. Prices rise faster than wages and the life style of Americans are going down.

I think one can argue that a sound money system that better respects people's hard earned money encourages honest work, encourages entrepreneurship. On the contrary, an economy based on trading paper, making gambling bets and winning at others expense is doomed to fail, as mentioned here:

http://kondratieffwinter.blogspot.com/2010/02/death-of-capitalism.html

Thus, my point is that the society and the social mood at aggregate is responsible for picking one way or the other. By tolerating the FED, by allowing the banks to create money out of thin air:

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

and by trading paper instead of producing real value, by borrowing and investing on granite counter tops we enslave ourselves to the Barons of Wall Street. The real entrepreneur spirit will not flourish under these conditions.

It is not the Robber Barons who make things better. It is the social mood itself who creates the right conditions so that these Barons can come forward and succeed. Here is how the social mood drives the markets, the economy, politics and the culture:

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

According to socionomic theory, the cycles of social mood define the booms and busts in the economy. The market declines first as the social mood turns sour. This is why earnings are good at the market top and bad at the bottom.

Similarly, in the midst of bad news and earnings, as the social mood improves, the market starts to rally. Just like we did back in March 2009.

These fluctuations in social mood define whether Robber Barons will be back or not. Not the other way around. If the market starts selling of now, expect more job losses, more housing crash, terrible earnings. When things look the darkest, it will be the bottom, and we will start climbing out of the depression. Then we may have the Robber Barons appear again. But we have not seen that dark bottom yet:

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

Ultimately, as part of the change, we need to overhaul our monetary system to use sound money that keeps it's value and respects the people's effort to earn it. We need to shrink the financial sector that lives off of commissions from the real economy. We cannot have 30% of the population shuffle money around and rely on the production of others to create value. Real economy cannot carry the interest burden that is being charged to sustain the life style of fat cat bankers. We need gold, we need deflation. We don't need the FED, we don't need the bankers. They are a burden on us to carry. Usury was forbidden for good reason.

How do politicians lie?

I came across this article that talks about how the politicians lie:

http://finance.yahoo.com/expert/article/economist/225007

and my comments about it may end up being then the article itself so I will post them here.

I am going to list more lies now. My explanations need to be considered in light of the following fact:

Banks create money when we borrow:

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

QUESTION: Why does the government allow mortgage interest deduction from income tax?
Official Answers:
1. Home owners make good citizens.
2. It is American dream to own your home.
3. This makes homes more affordable.

Let us analyze these answers and make the truth known now:
1. Good citizens are able to afford homes, not other way around.
2. Is it American dream to be slave to your mortgage for 30 years?
3. This does NOT make homes more affordable. It makes homes more expensive. Here is why:

Due to easier borrowing costs, this makes the home prices go higher, because people race with each other to borrow more. At the end, the buyer pays more to the seller. In the process, bankers get a bigger share out of the home sales. What does this mean?? Some percent of the population lives off of commission and interest based financial services and the rest of us have to earn more to sustain THEIR life style. Banks create money out of thin air and give it out as mortgage. They then demand interest for it. Until you pay, bank owns the home, with the money it created out of thin air!

If mortgage was not available, then home prices would be much cheaper. Why? Because you would not have to pay for the lifestyle of a fat cat banker for 30 years!

Greenspan kept the rates lower. Did this make homes affordable? No. Bush wanted affordable housing for all Americans. Did we not get the greatest housing bubble in history? Yes.

The government wants the fat cat bankers to earn a lot of money. Those bankers elect who governs this country with the money they get from usury. Money talks in this democracy. This is why America wants democracy around the world, so that the power of their bankers and capitalist elite can reach all corners of the world. If they ask the politicians, they would say "Democracy is good for the people". It may be. But that is not the reason why they send our soldiers to fight for it.

Why did they allow sub-prime? They allowed sub-prime because if they did not, deflationary would have come sooner. Here is the underlying debt problem that causes deflation:

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

For many decades FED made it easy to borrow. This is how US dollar was inflated. When we borrow, banks create money. This new money inflates the money supply. That punishes the savers such that it becomes very hard to buy your home cash down. This is what the FED and the government wants. That is FED targets 2% inflation. Why not target 0%??? 2% is low enough so that you don't rebel, but it is high enough that you cannot save to buy a home! If you were to save to buy your home, bankers would not make money. They would not have a 30 year claim on your earnings!

But they are running a ponzi scheme:

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

That is because when the entire population owes money to the banks, the money supply is not enough to pay that debt. Thus the borrowing had to increase exponentially in order to pay principal + interest of old debt. They wanted the ponzi scheme to get bigger (too big to fail) and run longer so that their bankers could keep earning interest without creating real value. After we ran out of prime borrowers, they allowed sub-prime. So that more borrowers could be brought to the ponzi scheme. No 20% down was OK so that you could borrow the full amount! Liar loans were OK as long as you were willing to be a "Good Citizen, aka Home Owner". So that the total debt we owe to the banks could get even bigger with higher interest demand! When we ran out of sub-prime borrowers, deflationary crash started.

Then they called it too big to fail! Their bankers were too important to take a pay cut. They allowed Lehman bankruptcy to convince the congress to give them a blank check. And they used tax payer money to replace their lost income. They saved the banks, that are the cause of the entire collapse, at tax payer expense!

In order to sustain their ponzi scheme they now pay 8K home buyer credit essentially hoping that you will borrow to buy a home. This is again at tax payer expense. All of these corrupt practices favor only 1 group of people: The bankers. In order to better our quality of life the first thing we need to do is to shrink the financial sector! Free markets signaled that, but the government was not willing to listen.

Banks are holding us like a hostage of the money supply that they control. They create money at will! And we end up paying for it in good days and in bad days! Who are the banks to create money out of thin air? Who is the FED to print our money?? Why does the United States Treasury borrow from the FED?? Government should belong to the people and people should be able to print their own money!! If money supply is to be expanded via borrowing, interest shall be paid to the people, not this banker or that one!

It is not a coincidence that wall street and these bankers are getting their record bonus in the middle of this depression! All of that pay comes from Joe the plumber, George the computer programmer, Mary the factory worker.

This is a corrupt system. It is bankrupt from the beginning. Banks, by creating check book money out of thin air, are making impossible promises. When these promises come due, tax payer is asked to pay for it! This rotten system is going to crash with a big noise. Prepare for the day of reckoning. Here is why:

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

Deflationary Depression

A deflationary depression is the direct result of excessive debt. There is no way to avoid it. Here is why in layman terms: When we borrow, we borrow from the future. If we don't pay back, and the future arrives, we find it empty, depleted, consumed.

What was borrowed will be paid back. Since we never paid back in the past (and always postponed every recession with more borrowing), we now have to face a deflationary depression.

Why can it not be postponed again? Because when the debt accumulates, there comes a time when interest burden on existing debt becomes unsustainable. It is like a family who borrows a big mortgage. Rates edge up and poof. Foreclosure. Here is the debt problem:

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

Printing money does not prevent the crash. It only changes who pays for it. When money is printed, savers pay. Banks etc get bailed out at other people's expense. Eventually, the value of what was borrowed gets deducted from the economy. Keep in mind, the threat of money printing may cause credit markets to freeze at the beginning, causing deflation (credit deflation) effecting prices of credit dependent items such as housing. This is because if creditors suspect US dollar will loose value, they will stop lending long term in US dollars, or they will demand very high interest rates.

Almost all of our entire money supply is borrowed money. It was created by the banks when we borrowed:

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

If you add others IOUs, especially social security, medicare etc, then we can assume that the economy is built based on the assumption that 50 to 300 trillion of money supply would some day exist. This money supply needs to have purchasing power. If it is diluted due to printed money, it won't serve it's purpose. For example, if social security paycheck does not buy you lunch, it does not matter that government obligation to pay it was satisfied. In such a scenario, consumer economy will collapse. People will not have money to buy anything other than necessities. Salaries will stagnate, thus it may be stagflation, if not hyperinflation.

Then, since hyperinflation is not the solution and may make things worse, FED may as well settle with a deflationary crash, at least for a while.

Remember that for FED to print more money, things need to get bad so that there is political will to print money. This is why deflation is likely to happen first and inflation may happen later. Here is a report of deflationary forces in 2010:

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

Coming back to the excesses mentioned in the article, here is a chart that shows excessive paper trading which cannot be sustained:

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

Here is why the stock market is a bubble:

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

This is like Tulip mania, South sea bubble. This one is Financial Mania. People who live through it do not notice it because it is so big. It is like walking on Earth and not noticing it is round, because it is so big.

The stock market crash will be visible in 400 year market charts, just like other major crashes.

Government Intervention Makes It Worse

They say government intervention into the free markets make it impossible to predict the future of the markets:

http://finance.yahoo.com/tech-ticker/govt.-interference-makes-it-%22almost-impossible%22-to-forecast-stocks-strategist-admits-431206.html

Whenever the economy falters, the government intervenes and "fixes" the problem. They created FDIC to prevent bank failures, they created FED to regulate the economy. They created Fannie Mae, Sallie Mae etc to guarantee mortgages. All of these are a failure. Economy fluctuates with violent recessions and depressions since FED was created. ** Mae are the cause of the housing bubble and the mortgage problems. Once they started purchase the mortgages, why would anybody care if a mortgage was wise to give out?

The government intervention for many decades is the reason of the crash. Mistake was to create FDIC, FED and other GSEs. Existence of FDIC relieves the depositors from the duty of making sure their banks do not take excessive risk. Unchecked by depositors, banks feel free to take excessive risk. If FDIC did not exist, banks would fail before they get too big to fail. Only the sensible would survive.

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

The FED has made credit easy for many decades and America has borrowed. When we borrow, banks create money, they do not lend existing money:

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

This is how US dollar was inflated for decades. Inflation did not happen due to printed money. But it happened due to borrowed money. When the debt expansion stops, money supply will deflate because it is all borrowed money. The US dollar supply is not enough to pay outstanding debt. Credit bubble is too big to fix now, and it is FED's mistake to inflate it for many decades. They set us up for a deflationary crash that will unfold now. Here is the debt problem:

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

Thus, despite government intervention, or even because of it, it possible to predict the market direction, and it is down!

Greatest Bubble in History

Prechter thinks stocks are a bubble and bonds are a bubble that is the greatest ever:

http://finance.yahoo.com/tech-ticker/bullish-a-year-ago-robert-prechter-now-sees-%22the-biggest-bubble-in-history%22-429931.html?tickers=%5EDJI,%5EGSPC,TBT,UUP,SHY,JNK,TLT

A deflationary depression is the direct result of excessive debt. There is no way to avoid it. Here is why in layman terms: When we borrow, we borrow from the future. If we don't pay back, and the future arrives, we find it empty, depleted, consumed.

What was borrowed will be paid back. Since we never paid back in the past (and always postponed every recession with more borrowing), we now have to face a deflationary depression.

Why can it not be postponed again? Because when the debt accumulates, there comes a time when interest burden on existing debt becomes unsustainable. It is like a family who borrows a big mortgage. Rates edge up and poof. Foreclosure. Here is the debt problem:

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

Printing money does not prevent the crash. It only changes who pays for it. When money is printed, savers pay. Banks etc get bailed out at other people's expense. Eventually, the value of what was borrowed gets deducted from the economy. Keep in mind, the threat of money printing may cause credit markets to freeze at the beginning, causing deflation (credit deflation) effecting prices of credit dependent items such as housing. This is because if creditors suspect US dollar will loose value, they will stop lending long term in US dollars, or they will demand very high interest rates.

Almost all of our entire money supply is borrowed money. It was created by the banks when we borrowed:

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

If you add others IOUs, especially social security, medicare etc, then we can assume that the economy is built based on the assumption that 50 to 300 trillion of money supply would some day exist. This money supply needs to have purchasing power. If it is diluted due to printed money, it won't serve it's purpose. For example, if social security paycheck does not buy you lunch, it does not matter that government obligation to pay it was satisfied. In such a scenario, consumer economy will collapse. People will not have money to buy anything other than necessities. Salaries will stagnate, thus it may be stagflation, if not hyperinflation.

Then, since hyperinflation is not the solution and may make things worse, FED may as well settle with a deflationary crash, at least for a while.

Remember that for FED to print more money, things need to get bad so that there is political will to print money. This is why deflation is likely to happen first and inflation may happen later. Here is a report of deflationary forces in 2010:

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

Coming back to the excesses mentioned in the article, here is a chart that shows excessive paper trading which cannot be sustained:

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


Here is why the stock market is a bubble:

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


This is like Tulip mania, South sea bubble. This one is Financial Mania. People who live through it do not notice it because it is so big. It is like walking on Earth and not noticing it is round, because it is so big.

The stock market crash will be visible in 400 year market charts, just like other major crashes. Kondratieff Winter is upon us.

Decline in Social Mood?

A troubled person flew his plane into an IRS building. What did this solve? What did this person want to achieve? If you don't like to pay taxes, then work and vote for those who support a small government. This is democracy. Yet we have two parties that are pretty much the same. We need more choices to vote for. Come forward, and we can change the system through democratic means. First and foremost, current system is under the control of capitalist elite due to their power through money.

A true democratic system must allow different opinions to be heard equally, regardless of campaign contributions.

In China communist party rules, in America, the capitalists rule. Only the name and the means are different. But it can be changed by the people. It is our country. Vote in the right direction, and we can change it.

The government should get out of the economy. It is not government's job to find people jobs. It is not the government's job to rescue failing banks. Let the free markets run. It was FED intervention to interest rates for many decades that created the credit bubble. It was government intervention with low rates that created the housing bubble. The crash is the result of these bubbles.

It is not the government's job to allow mortgage interest deduction from income tax which indirectly channels tax payer money into the banks. If the government is going to tax people, it should tax them fairly.

FDIC is the reason why banks are failing. FDIC is the reason why banks took unchecked excessive risk. Had it been a free market at play, depositors would question each and every bank action because their own money would be on the line. But when the government guarantees depositors money, who is watching for tax payer??

All of these can be fixed with a small government, and a free market economy that does not have government intervention. But that is a long way. And we are actually going the opposite way now.

If the government stops messing with the economy, it will find room to shrink itself. It will not need to tax people as much. Then people will work in a free economy to earn their life through competition, innovation, invention and discovery and the sense of freedom will be greater and the rewards will be greater.

Unfortunately, this is how society evolves. According to socionomic theory, socialism will find followers as the social mood decline continues:

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

Death of Capitalism?

Read and ponder:

Americans are "downbeat about today. Upbeat about tomorrow," says the latest USA Today/Gallup Poll. "Americans feel battered by hard times, record home foreclosures, stubbornly high unemployment rates and war."

And yes, we are "fed up with Washington and convinced more than 3 to 1 that the nation is heading in the wrong direction," yet there's "confidence that there will be better times ahead, that the classic American dream endures and hasn't been extinguished. It's not even at its low ebb." Why? Because we're in denial!

Do Main Street's 95 million investors know something Warren Buffett's long-time partner, Charlie Munger, doesn't know? Munger is warning us "It's Over" for America. Yes, "o-v-e-r," America's in decline, at the end-of-days, coming to "financial ruin," says Munger.

http://finance.yahoo.com/banking-budgeting/article/108901/death-of-american-capitalism-the-10-final-scenes

I think he is right! How did we get here? Greed of bankers who know nothing other than making money using usury.

In the past economy seemed to be doing OK solely due to credit inflation that FED has fostered. FED made it easy to borrow. America 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

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

FED and the US government are running a ponzi scheme that is about to stop now. 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 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...

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. Why? Now you know why. But it won't work. 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. 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!

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

There is nothing FED can do about it. Credit inflation happened last 50 years. The bubble is inflated. The cause is in place, the effect will follow. It will deflate. For inflation to happen, all of the following must happen:

1. FED makes credit available. [Yes they do]
2. Banks must lend. [No they don't, because they don't think they will get their money back]
3. Borrowers must borrow. [No they don't, because they don't think they can pay it back]
4. Consumers must spend extravagantly and chase too few products with too much money. [Consumer is a saver now]

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

The best thing you can do now is to pay off debt and become debt free, because it will get harder and harder to make money in an economy where the total money supply is shrinking at record speed. M1, M2 does not matter. The bulk of the money supply is bank credit! 95% of our money is borrowed money. It has principal + interest to pay back. So, we have the principal since we borrowed it. Where will the interest portion come from so that we can earn it and pay it back??? It does not exist! It is a ponzi scheme. The music has stopped! In a credit based monetary system, we must keep borrowing or the economy will stop. That is what is happening. It is called deflation. The money supply is deflating. When there is 10 times less money in the system, it will be impossible to keep the current prices and salaries at the current levels. Pay off debt now and be debt free. Get ready for days where there is no money to be earned!

Stocks are over valued by wide margin. Prices are based on credit inflation of 50 years. It is like South Sea bubble! Stocks can crash and not come back for 100 years!

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

New credit card laws

They talk about double standard about the new credit card laws for the banks:

http://money.cnn.com/2010/02/22/smallbusiness/credit_card_rules_small_business/index.htm

It is sad that people discuss the fees the banks charge tothe customers. But they fail to see the forest for the trees. These banks are robbing you everyday! When you get a loan, they create money out of thin air with the click of a mouse, and they demand interest for it, and you work the hard way and earn it to pay them back, so that they can sustain their lifestyle with usury:

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

Interest based economy coupled with fractional reserve banking is the cause of the inflationary boom and the deflationary crash. Deflation is built into the monetary system just like inflation is! But when inflation happens, banks run away with their profit. When deflationary crash happens, government tells you bank losses are something YOU have to pay for!!THAT is the double standard!! You and children, and your grand children and their children will pay for the life style of the USERERS for generations to come! Fools.

http://finance.yahoo.com/taxes/article/108885/low-inflation-doctrine-gets-a-rethink-but-shift-is-unlikely?sec=topStories&pos=6&asset=&ccode=

They are saying it would have been better if interest rates were higher to begin with so that if the FED cut rates, it would have had bigger effect, now that FED is stuck at 0% and cannot go -1%.

The truth is the FED should not have messed with rates at all. Let the free markets set them. At boom times rates will go higher, and at recessions, they will go lower as the demand for money dissapears.

Why FEDs Hands are Tied About Deflation

Normally, FED makes borrowing easier by making credit cheap. But it won’t work now because:

1. Banks do not want to lend because they think they may not get the money back.

2. Borrowers do not want to borrow because they think they may not be able to pay it back.

3. For inflation to happen consumer must chase too few products with too much money.

We have the opposite. We have wage reduction. We have unemployment. Consumer is a saver now.

This makes it very hard to expand the bank credit. Here is how banks create money out of thin air to inject into the economy:

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

FED has been inflating bank credit for the last 50 years. It needs to inflate exponentially, higher and higher compared to the GDP to have the same effect. In other words, to have $1 increase in GDP, it takes more and more debt every year. When debt is not increasing faster, it becomes impossible to have that $1 gain in GDP.

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

To encourage borrowing, government has various programs such as mortgage interest deduction from income tax, 8K tax credit for first time home buyer etc. The government does not want Affordable Housing. As home prices are coming down, instead of celebrating, they try to inflate it right back up. Why?

Because when people borrow to buy a home, banks create new money, this new money makes the government look good. Government has been using this to get re-elected all the time. But the population has a borrowing limit. Now the home prices are lover, number of sales are less. The total amount of lending that can be done for the banks will not be sufficient to expand the credit supply to a level that can sustain the GDP growth.

This is why the current stock market and other asset prices are likely to be over priced now. We have not seen the stock market bottom in March 2009:

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

Why Did Greenspan Keep Interest Rates Low?

If Greenspan did not inflate credit for last few years, then the deflationary crash would have happened sooner. The total debt is too high. It will deflate. Inflation is the only game in town that the government has to make itself look good. When we borrow, banks create money out of thin air and they demand interest for it. They don't give out existing money.

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

New money makes it easier for people to earn it. People think government is doing a good job. Where as all they do is to borrow from the future. They went through prime borrowers. When there was no one left to borrow, they went through sub-prime. When that ran out the deflationary crash has started. It will be very hard to inflate it again at these debt levels. It will deflate until debt falls back to sustainable multiples of GDP. Here is the debt problem in the United States:

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

Much of the western world faces the same debt problem. Every year, to sustain GDP growth we have to borrow more and more. Exponentially more. That has stopped. We need a new housing bubble to increase debt. But home values and sales are down now. Even if we borrow to buy homes now, the new money that will be created will fall short of necessary levels. It is a dead end. FED is trying to make the crash smooth. There is no recovery what so ever. Otherwise they would be hiking the rates and pulling back the mortgage support. But that aint possible anymore. We are toast. Mistake was to inflate credit exponentially for the last 50 years. The cause is in place. Effect will follow:

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

Great Depression will pale compared to the coming crash.

Why the Housing Market Must Recover

The so called economic recovery is underway. The government and the FED is trying to help the housing market. In other words they are trying to propell the home prices. Would it not be better if home prices were cheaper? Would it not be better is Americans had "Affordable Housing"? The government does not think so, despite all their Affordable Housing talk. They only like affordable mortgage.

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.

The truth is 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. A good life style does not mean you have to pay mortgage to a bank for 30 years.

A good life is when you own your house outright. But the government, the FED do not want you to achieve this dream. They inflated the housing bubble on purpose. They are trying to do it again. Why is that? That is because a big chunk of the population works in financial services. Their job is to create money out of thin air, demand interest for it, and sustain their life based on the efforts of rest of us. And the rest of us pay for their 'services'. We can understand why they exist if finance is like the oil in an engine. It is needed to make it run. But we cannot have a large population work based on commission (interest) because the real economy (production) cannot sustain the interest burden. However, Wall Street and the banks are powerful and they do influence government policy.

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? That is why they allowed sub-prime, no 20% down, liar loans... We went through sub-prime borrowers and there was nobody left who could borrow. 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 credit deflation:

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