Economists Announce Biggest US Job Loss Since 1945

The forces of depression are getting a drop on the new year. The bureau of labor statistics announced today that the US had undergone the biggest job loss in the United States since 1945 in 2008. These days people are expecting bad news, but what the questions that we need to ask is how come no mainstream economist saw this coming? How come we don’t see Keynesians falling all over themselves admitting that their phony theory has little predictive value in the face of the tremendous magnitude of this decline? After all, Keynesians tout the stimulating effect of government deficits. How can it be that after eight years of George Bush, who took this country further into debt that all of his predecessors put together, that we are now facing the worst economic scenario since the Great Depression?

Of course, I know how unseemly it must be for me to be attacking John Maynard Keynes on the eve of President-Elect Obama’s inauguration. The man hasn’t even gotten to power yet, and I’m already faulting the underpinnings of his economic bailout plan. And while I’m attacking Obama, what’s up with appointing lobbyist Willian J Lynn III to be the #2 person in the Department of Defense? I thought Obama was supposed to be cleaning up Washington by keeping lobbyists out of his administration. At least, that’s what Democratic talk-shot host Rhadi Rhodes was shoving down my throat back when I called into her radio show. On that particular day Ms. Rhodes was talking about the cronyism going on in the Wall Street bailout and I called in to showcase that this was another case of where the government had proven very ineffective at performing any regulatory function because the oversight boards are inevitably dominated by the corporations they are supposed to watchdog. She fired back how Obama was going to change all that. “Change I could believe in.”

Well, I don’t mean to run the poor man down, but if he’s made a pledge to keep lobbyists out of his administration, then why break the promise? I’m sure there are plenty of other well qualified non-lobbyists out there who can run the post. And this is the Department of Defense we’re talking about. That’s only the nexus of government and the defense industry which President Eisenhower warned about in his farewell address– a warning that has since gone ignored. 

When looked at from a purely Libertarian standpoint, the US Government has three branches, but they aren’t the ones you’re thinking of. Instead of the Executive, Legislative, and Judicial, the US Government has the Banking, Defense, and Welfare branches. The Defense industry expands the empire, while the Welfare branch keeps people appeased in the classic Roman “Bread and Circuses” combination. The Banking branch ensures that the other two branches have all the money that they need in order to function by creating money out of thin air and sending the bill to our future generations. 

As I’ve said many a time, this story is not going to end well. No amount of bank created stimulus can keep this impossible situation going. It’s going to collapse, and soon.

2009 Off to a Rough Start

For the first five days of trading of 2009, the Dow has fallen from opening around 8800 to closing today at 8750. Gold’s down some $40 too as its Comex price has fallen to $844 an ounce. No Earth shaking moves in these first few days of trading, but the investors are watching each other and trying to gauge the mood. A lot of people are expecting 2009 to be an up year for stocks. The logic is that last year was the second most horrible on record, so this year should see a big bounce after a big fall.

As for me, I feel that making a prediction about how stocks will do in 2009 is a luxury I can ill afford at this point. It just seems so far away and there are so many unknowns that going to have to develop over the course of the year before a clearer picture emerges. Markets are, after all, made of people, and people are unpredictable. At this point in I feel like I’m watching the Super Bowl warm-up show. I’m sure the hardcore football fans will know what I’m taking about- that show that comes on before the Super Bowl where the sport’s commentators fill up airtime talking about all of the players, their strengths and weaknesses, and the game plans they tend to use. Those shows take almost as much time as the Super Bowl itself, because you can endlessly debate how the teams should match-up, but no one will really know until after the fact how they will match-up.

Well, here’s Preston’s pre-Super Bowl commentator show. The players that are going to be squaring off this year are many. We’ve got “Helicopter” Ben who’s certainly proven to be true to his nick name. He’s showering money down upon anyone and everyone who could possibly ask for it. Recently he went so far as to essentially eliminate short-term interest rates and he’s said that he won’t rest until he uses more newly created money to crank down the long-term interest rates too.

Joining Ben’s team are two new players, Barack Obama and Timothy Geither. Both are talking a big game. Obama in particular is saying that he wants to run up the deficit score another trillion dollars over the course of this year and “for years to come.” That’s quite a powerful inflationary combination. The ultimate Keynesian fantasy of monetary stimulus complemented with a strong  fiscal stimulus. The classic team of the banking system and government working in combination. One makes the money and the other spends it. Together they represent a potent inflationary team that is dedicated to pumping up the stock market. 

But the inflationary team is up against some tough competition this year. The biggest concern I’d have for team inflation would be that the other nations of the world refuse to soak up the dollars they are going to throw off. In particular, I’d be concerned about China. China has been the primary consumer of newly created US Dollars over the last few years, but lately, according to a NY Times Headline, China Losing Taste for US Debt. If that’s the case, then I’d say this inflationary team is about to meet it’s match; the Fed can print all the money they want, but if people don’t value it, it’s not going to do a damn thing but cause spawn runaway inflation. 

Obama seems to feel that he’s stepping into the shoes of Roosevelt, but Roosevelt ran against Hoover by saying that his policies of taxing and spending were reckless. It was only after he gained power that he developed a taste for it himself. Obama’s coming onto this stage not only broadcasting his love of inflation, but just how much inflating he’s willing to do. For a President-Elect to announce to the world that he intends to run trillion dollar deficits “year after year” is simply unheard of and I’m sure it’s quite a gut-check for the current holders of our debt. Are they really going to just stand by and continue to loan us another few trillion?

Inflation has always needed a bit of subterfuge to exist. In his book, Human Action: A Treatise on Economics, Ludwig von Mises wrote:

Inflation can be pursued only so long as the public still does not believe it will continue. Once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed. Only the belief, that the inflation will come to a stop, maintains the value of the notes. 

He didn’t get that exactly right. It would seem that people tolerate a little inflation far more than Mises anticipated. Still, I doubt the Fed is going to be able to keep inflationary expectation well “anchored” with these trillion dollar deficits coming down the pike. 

And if our foreign lenders decide to stop loaning us the money, then the whole inflationary plan will be wrecked. Then, and only then, will Ben, Barack, and Timothy, have to contend with how to get us out of this mess without the trusty tool that’s worked time and again since the 1980s. In that eventuality, fasten your seat belts because it’s going to be a bumpy year.

My Investment Scorecard for 2008

I just went through and reviewed how my investments did throughout 2008. I will now reveal my result. Drumroll, please.

In 2008 … my ROI  was …


That’s right. While everyone else went broke, I was makin’ bank. How on earth did I do it? Okay, okay, okay — I’ll tell you. But only ’cause I’m a nice guy; I had three investment accounts: a ROTH IRA, a traditional brokerage account, and a Variable-Universal Life Insurance Policy. At the start of the year, my accounts were invested as follows:

* My VUL Policy had roughly $3500 invested in Gold Mining Stocks through the Rydex Precious Metals Fund. (RYPMX)
* My Roth IRA had roughly $17,000 invested in Water Mining Companies (PHO) and gold bullion (GLD).
* My traditional brokerage account has roughly $1500 invested in the Prudent Global Income Fund (PSAFX)

As you can see from the start, I was invested to profit from a falling dollar. Let’s take a quick step back into the recent past; last fall, to be specific.

It’s October, 2007. The stock markets have recently reached their peak with the Dow Jones closing at 14,100 on the 9th, and I just don’t see how stocks will possibly hold any value with all the bad news now coming out. At the dawn of 2008, I want to try and steer as clear of the main stock market as I can; as February ends, I liquidate both of my Roth positions, basically breaking even.

Springtime, and the market’s begun to heavily swoon; I want to reposition myself to profit from the short side. I put my Roth money into the Prudent Bear Fund, (or BEARX) since it’s 70% short the market, and 30% long on gold mining stocks. Now it’s June; I’m investing another $5,000 into my Roth, (my 2008 contribution), and also continuing to invest in Prudent Bear.

Here comes a September to remember. We see the bankruptcy of Lehman, and the stock market rallying on the news. I’m basically sitting flat in my portfolio for the whole year — quite frustrating. I’d positioned myself well to profit from all of the bad news, and despite the copious amount of it, I’ve yet to show a profit. In fact, the stock market’s flaunting its irrationality by rallying strongly on Lehman’s failure. Over the next couple of days, it’ll proceed to fall, only to rally again as a Keynesian trifecta of Paulson, Bush, and Bernanke totally blow my mind announcing the TARP program.

Now, I’m in totally uncharted territory. I knew the period of history I was living in would show a stock market deflation in comparison to gold, but I wasn’t sure if it would from stocks falling, or gold rising. At the time, it seemed the Powers That Be would be combating the falling market with inflation, and so betting the market would fall, wouldn’t be a winning choice. Going forward, I figured that either: inflation would take hold, raising all boats, (favoring gold particularly), or the market would crash, causing people to then rush to gold in the panic. So, either way, gold was the way to go.

But here is where I made a critical error, choosing to liquidate my short positions just prior to the October crash. I wasn’t sure where to put my money, so half of it went into Barrick gold mining stock (ABX) @ $37, and the other, just sat in cash. A week later, the market’s started crashing, as the credit markets freeze. Barrick’s up to $38, but everything else is uncertain. Volatility has overtaken the market, values bouncing all over the place.

The now frozen credit market prompts me to look into bonds; and, sure enough, I find some South Trust, rated AAA, maturing six weeks from the day I bought them, yielding an annualized 30%. Having done my homework, I knew South Trust, recently acquired by Wachovia, had now been taken over by Citigroup. Seemed pretty clear from all of the TARP madness that Hank, George, and Ben were peddling that Citi wouldn’t be allowed to go bankrupt. So, I sold most of my Barrick stock (for a small profit) and put the $20,000 into the South Trust bonds.

Turned out, it was a great move. Not only did I make $800 in six weeks when they hit maturity, but I say out the bulk of the decline in Barrick. I’d been actively trading it up and down in my traditional brokerage account, pretty much breaking even once all was said and done. But, as the bonds matured, I was still able to scoop up a ton of Barrick Gold close to the bottom. It was a decision at the time, trying to figure out if I should put the whole $21,000 to work in Barrick, or only half, instead. At this point, Barrick was range-bound between $20 and $25, so I decided to invest $11,000 into Barrick at $20.50, leaving the rest in cash to buy more, should it have fallen any further.

Of course, this was a decision I’d come to regret as Barrick took off — and never looked back.

But, by year’s end, Barrick would be trading in the neighborhood of $36 a share, my $11,000 investment now worth $20,600; had I bought in with everything, knowing I would’ve made even more.

Ah, well. It beats losing money.

As 2008 came to a close, I broke even in my traditional brokerage, (funded up to $9,000), my VUL had fallen to $2,200, or so, with my Roth sitting pretty at $32,000.

Okay, I know my math isn’t exact here, because I’ve not annualized any of these figures to correct for the fact that a lot of the money was added mid-year. If I did, my ROI would be even higher. But why be greedy?

All that being said, my final scorecard was:

Start 2007                    Money Added                     Subtotal                      Year-End
Roth IRA                   $17,000                           $5,000                          $22,000                       $32,000
Traditional                 $1,500                           $7,500                           $9,000                         $9,200
VUL                            $3,500                             $260                           $3,750                          $2,250

Totaling up the subtotal field, I get $34,750 and a year-ending of $43,450. That’s right at 25%. As I mentioned, if I’d have corrected the ROI by factoring in the added money only being used for half the year, that ROI would be even higher.

Furthermore, since the major gains all came in the Roth account (which is TAX FREE, don’t forget) that means that my “tax equivalent yield” is even higher. That’s just a fancy way of saying, that since I don’t have to pay taxes on the gains in the Roth, the return is the same as making a greater amount that I would pay taxes on.

All in all, it was a profitable year.

TIME Magazine Assigns Blame for Financial Crisis

If anyone’s interested, TIME Magazine recently gave its top ten list for who’s to blame for this financial crisis. Without further ado, here it is — (accompanied by additional commentary by yours truly):

1. Good Times.

According to TIME’s Justin Fox, “Blithe behavior begat trouble.”

I suppose that’s true. As Charles Kindleberger documented in his book Manias, Panics, and Crashes: A History of Financial Crises, people will often get swept up in a mania, then look absolutely foolish once the bust hits. Kindleberger himself points out that over all of the financial crises in history, none have happened with the frequency that we have seen over the last 50 years or so. Our current financial crisis has befallen us after the collapse of the Internet bubble, which sunk to its greatest depth in 2003.

Historically, manias don’t happen back-to-back. This crisis was not driven by the madness of crowds on Main Street, but rather the insanity that was going on at Wall Street. So, I’ve got to disagree with Time placing this as the #1 reason.

2. Alan Greenspan.

Bingo! Fox and I agree here; I also commend the magazine for coming forward and naming names. As told most succinctly in William Fleckstein’s book Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve, Greenspan engaged in a campaign to avoid a recession by continuing to keep interest rates low over his tenure. He blew bubble after bubble, and now we are paying.

3. Twisted Regulation.

Again, I can agree with Fox on this one, despite my being Libertarian. Washington helped to foster this crisis by passing the laws that allowed banks to start repackaging mortgages and selling them to investors, and turned a blind eye to the obvious conflict of interests that developed.

4. Wall Street.

We’re in agreement here as well.

5. Home Ownership Obsession.

Fox says, “Homeownership generally is a good thing. Massively subsidizing it via the tax code might not be so smart. And turning a blind eye to crazy lending practices because they seem to encourage it definitely is not.” I agree.

6. Too Much Money.

According to Fox, “Lots of people worried for years that the gigantic trade deficits the U.S. ran up with, first Japan, and then China, were hurting domestic manufacturers. But the flip side of those trade deficits — gigantic capital flows into the U.S. — may have been even more dangerous. It was the capital gusher from China in particular that inflated the 2000s real estate bubble.”

TIME neglects to say where all that money came from, though; it was created by the Federal Reserve to help us avoid a recession. Which brings us back to our monetary system.

7. The Myth of the Rational Market.

Wow. Fox and I agree again. I’m happy to see people poking holes in one of economists (Macroeconomists, especially) favorite theories, but I worry that people’s natural reaction will be to call for more regulation.

8: You and Me.

According to Fox, “None of this would have happened if millions of us hadn’t come to believe we could get something for nothing by taking on debts we couldn’t repay. That this misconception was fostered by lenders and politicians is a partial excuse but not a complete one. Thanks to the Panic of 2008, though, we can count on nobody making this mistake again, at least not for a while.”

Man, TIME is starting to sound almost Austrian in its Economic outlook. If people come to realize as Frederick Bastiat wrote that ” … everyone wants to live at the expense of the state, ‘they forget that the state wants to live at the expense of everyone else.’ ” But, despite applauding the integrity of Justin Fox and Time magazine, I think they are wrong in saying that “we can count on nobody making this mistake again…” Indeed, the US Dollar is the ultimate example of something for nothing, and we seem to believe that so completely that the 30-year government bond is currently yielding 3.03%.

9. George W. Bush.

From TIME: “A lot of the government decisions that led to our current pass were bipartisan. Some were the doing of Democrats. But you can’t be a two-term president with your own party in charge of Congress for most of your time in office and escape blame for the economic debacle that unfolds as you prepare to leave town. The specific Bush act that probably contributed most to today’s difficulties? His reckless disregard for sound fiscal policy, as his tax cuts and war spending combined to turn budget surpluses into chronic deficits.”

Sing it, brother!

10. Commodity Futures Modernization Act.

Fox says, “If you had to pick a single government move that did more than any other to muck things up, it was probably this bill, passed by a Republican Congress and signed into law by lame-duck President Bill Clinton in December 2000. It effectively banned regulators from sticking their noses into over-the-counter derivatives like credit default swaps. There’s no guarantee that regulators would have sniffed out the dangers in time, but banning them from even looking sent a pretty clear ;anything-goes; message to OTC derivatives markets.”

This seems a repeat of the ‘twisted regulation’ point they made earlier, but I can’t fault them for recycling material. Especially if it’s valid.

11. Rating Agencies.

Absolutely. When the wizards of modern finance can get together and crank out debt instruments based on subprime mortgages that receive a AAA rating, then something is indeed rotten in the state of Denmark.

12. Letting Lehman Go.

Oh, so close! TIME fumbles the ball while rushing for the touchdown. If banks (particularly investment ones) are improperly run, then they should be allowed to fail. To do otherwise is to court moral hazard.

I’ve gone on about this at length in this blog in previous posts, so I’ll stop here.

Staying Motivated in Today’s World

I have a good friend named Baron in Los Angeles. He plays in a rock band, Manic Automatic, and he really deserves credit for getting my interested in looking into the ill effects of the Federal Reserve on American society. He’s going through a rough time in his life right now. Part of it is just those moments we all go through as we age and realize that all the dreams we had growing up have gone unfulfilled, but part of it probably related to his politics. He shares my Libertarian outlook on American politics and that means that, unlike the vast majority of the politically aware American public, he never gets to really celebrate when looking at an election result. Instead he just seems to get increasingly disgusted with a world that seems comprised almost entirely of sheep and the shepherds in the banking industry who are there to sheer them. I understand his frustration because I feel it too.

I was reminded of this recently when I was listening to Andrew Gause being interviewed on Mr. Gause wrote the book, Secret World of Money
as well as Uncle Sam Cooks The Books. At one point during the interview he talked about studying the Federal Reserve for over thirty years and that over that time he had gone from trying to awaken people to action to simple acceptance of what was going on. I don’t have nearly the length of time under my belt that he has, but I have also reached the same sentiment. 

As Morpheous says in the movie The Matrix “You have to understand that most of these people are not ready to be unplugged. And many of them are so inert, so hopelessly dependent on the system that they will fight to protect it.” And so it is with us. Americans can be made to understand that their monetary system is entirely run by a banking cartel that pursues its own interests well ahead of considering theirs, but most of them just don’t care. For those politically minded enough to even be able to follow, the Federal Reserve is part of an indispensable system that they need in order to make the beliefs they are truly passionate about doable. After all, the Republicans want war and the Democrats want the socialized medicine. Neither of those things would really be doable in the absence of a fiat money system. 

And so we go through life; we are surrounded by people who simply don’t realize what’s going on. They are either to apathetic or ignorant to care or they have allowed themselves to be so deluded that they can’t understand the problem outside of the a political framework that makes the problem unsolvable. Few people understand what a gold standard is, what’s our Constitution says about gold and silver being legal tender, or that the world we live in today is not so much better than the old that those ideas have not lost their relevance. Of the few people out there who do care, they are typically so distrustful of the system that they believe so many conspiracies as to simply file “Federal Reserve” as just another conspiracy they believe in such as the JFK assassination or that 9/11 was an inside job. Being a scholar of the Federal Reserve is a lonely life. 

I think the problem here stems from the impossibility of the situation we realize we are in. The world’s banking system is so entrenched that we few who really understand what is happening could never hope to dislodge it. What are we to do then? I say we simply come to terms with this fact; that we put our arms around it and really accept that no matter how much proof we amass as to who is really going on, we will be powerless to change it. Our true power comes in being able to use our knowledge for our own personal gain. 

What? Did you think I was going to say that we use our knowledge for good? What’s good in this world? When the voting population of the United States votes to re-elect George Bush so that he can continue to mortgage our nation’s future fighting a war that was started with a lie, what meaning does this notion of good really have. Sure, we should try to be good to each other and we should engage in a system of ethics such that we improve the sphere of our world that is right around us, but the more money we have, the more good we can do. Instead of blindly investing our money like sheep and allowing ourselves to be sheared, why not use our knowledge to enrich ourselves? 

I’ve been able to soundly beat the stock market year after year and most of that comes from simply trying to figure our what’s really going on in the world and reacting accordingly. When I come to the investing landscape with full knowledge of what’s really going in in the world and everyone else is employing a buy and hope philosophy, I’m at a huge advantage. I have enjoyed using this advantage to enrich myself and I will continue to do so in the future. Why bother trying to save a world that doesn’t want saving when you can gain access to wealth through predicting the Fed’s next move?

I don’t know about you, but those thoughts are what gets me out of bed in the morning. To indulge in the idea that we can somehow defeat the world’s banking system is folly. Sure, we can show how the world is worse off because of it, but no one really cares. We have to accept that most people simply don’t want to be unplugged and instead use the powers that we do have to lead extraordinary lives.

Gold Ends 2008 up 5.53%

Not many things made a profit this year, except my old friend gold. Gold started this year priced at $838 an ounce and it closed 2008 at $884. That means that if you’d just bought and held gold all year, it would have gained you 5.53%. That’s an appreciation that is better than money market accounts and government bonds. As I’ve described in these pages many times, gold is the best asset there is for preserving your wealth in these tough economic times. It should also do really well in 2009. 

You see, the Fed is trying to reignite inflation and they’ve pumped a lot of money into the system to lower interest rates across the board. When you see thirty year bonds yielding somewhere in the neighborhood of 3-4% you now something weird is going on. I believe that the Fed will be successful in there attempts to blow one last bubble and that we will see consumer spending make a rebound this year, and many Americans will probably breath a sign of relief just to see George Bush leave office. Obama’s probably going to have a celebrated first year and it’s probably going to cause a significant enough rally for people to think that worst of the economic crisis is over. 

Of course, all that’s really happening is that the Fed is blowing one more bubble in the bond market. When that one crashes the economy will be even worse than before and we’ll be right back into this same mess, except the Fed will have run out of wiggle room in their interest rate policies. Once you’ve cute rates to zero and lowered the thirty year note down to 3-4%, you’ve started to run out of monetary shenanigans to pull. That’s when things are really going to get interesting. 

My regular readers have probably noticing that I haven’t been posting as regularly lately. That’s due to two things: spending time with family during the Christmas holidays and studying for the series 7 exam. I’ve made roughly 20% or more for the last three years and so I’m working to hang up a shingle and start managing money for people. And that’s requiring some study on my part. But fear not. I will be returning to California and my old routine on Monday. 

Till then. Happy New Year.

The End of Deflation

About a month ago I made a prediction that the whole deflation story was done and that we would start to see a rise to inflationary expectations once more. I’m feeling pretty good about that prediction despite the price cuts many retailers were making during the holiday season. I even experienced one myself in going to get a last-minute Christmas gift for my mother. So, dropping by Best Buy and picking up Curb Your Enthusiasm – The Complete First Season, I went to the cashier expecting to pay the full $36 retail; unbenknownst to me, they were instead running a half-off all HBO-series sale — I got out of there for less than $19. You might say I experienced a bit of holiday deflation first hand.

You know, I have to say, it actually felt pretty good. Suddenly, I wanted to buy every season they were selling past the first I was already getting. That just goes to validate one of the oldest truisms in Economics:

The Law of Demand.

When the price falls, demand increases. So, you can ignore all of those Macroeconomic wonks who tell you that deflation causes people to hold off spending in anticipation of lower prices. It, and almost every other aspect of Macroeconomics, is just not true. The real reason central bankers hate deflation is because it’s primarily caused by people going broke from overextending themselves in credit, and now can’t afford to pay. That would be a tragedy for the bankers; because they’re the ones who made the loans to begin with, now they would be looking at losses. Bankers hate losses. They hate them so much, they’d much rather hide behind some cooked-up lie about the harmful effects of deflation in order to call for bailouts.

Going forward, we may see some prices fall, but the deflationary scare of October and November is starting to fade. With Obama coming in and promising to stimulate the economy by deficit-spending some $1 trillion dollars or so, in combination with our pal Ben cutting interest rates to zero, we can expect that the spectre of deflation has safely been put to rest.

Although, I am expecting one more strong down leg in the market in the next few months: expect to see the Dow approach 5000 or so in 2009. What’s going to be curious to see is if gold follows it down, as it did in October, or instead, rises as gold is supposed to do. It can be hard to figure these things out, but I’m expecting it to rise this time. There should also be less forced liquidation by hedge funds, because I figure they got rung out of the market already.

Gold stocks, like Barrick, aren’t nearly as cheap as they were in October and November — when it was trading at a PE of roughly 10. It just ended the year trading at a PE of 18 or so. That stock rewarded me greatly this year. I was able to buy in at close to the bottom and nearly double my investment.

I think I’ve got the fever of just sitting on my cash and waiting for the next plunge. Of course, the problem with that is, you never exactly know when it’s going to come.