How to Apportion a Larger Portfolio

My brother called a couple of days ago. His wife has $100,000 to invest and he wanted to know where I thought I should put it. I’ve made recommendations in the past and they’ve always made money; which I feel puts a bit of pressure on me because each time I feel I’ve got to live up to my own record.

It’s also tough because the investment market is so screwed up with the recent actions of the Federal Reserve. In the 1800s, investing was pretty simple, you just put your money in bonds and forgot about it. Since consumer prices went down for most of the 1800s (with the notable exception being the war-time inflation of the Greenback fueled Civil War) the return you received on bonds would be in addition to the additional purchasing power the money itself possessed. Few people invested in the stock market in those days; it was seen as a shady place where individuals like Jay Gould, Cornelius Vanderbilt, and Nathan Rothschild could use their deep pockets and insider information to force a stock price to be whatever suited them at the time. A stock exchange was more casino than sober investment house. Bonds were where the common man should put his money.

Of course, the advent of the Federal Reserve changed all that. Continue reading How to Apportion a Larger Portfolio

12 Days of Christmas Inflation Index

I’ve been saying for a couple of years now that the talk of deflation was going to go the way of the dodo. This year it really seems to have hit home. The only people I see talking about inflation are the bankers at the Fed, who are getting chastized by the international bankers for just using it as a ruse to print money- which is exaclty true.

The Fed points to the Consumer Price Inflation Index as proof that inflation is not happening, but as I pointed out in my book, that index has been tortured to the point where it will confess to anything. I really enjoyed this video entitled Quantitive Easing Explained, for many reasons. Primarily it’s both funny and accurate, but I also love the way it goes over so many items that are more expensive than they were a year ago.

Clearly, comumer prices are going up. The latest story to discuss the rise in consumer prices is the Christmas Index or the price of all the items mentioned in the 12 Days of Christmas. According to the most recent calculation, the Christmas Index is up 10.8% over last year. A 10.8% rise in a basket of goods in a single year is pretty astounding, and I’d venture to guess that it may have something to do with all the money the Fed is printing- call me crazy.

In the 1970s, inflation close to 11% was an unstabalizing force in society and the economy as people began raising prices and demanding more interest in anticipation of future inflation. You know what they say about history and those doomed to repeat it. What can I say, predicting the future is really pretty easy if you know where to look.

Can the Fed Tighten the Money Supply in Time?

Lately I’ve been reading opinions about the market that tell their readers not to be too worried about inflation. Sure, they’ll admit that expanding the money supply correlates sharply with inflation, but they tell me that Ben Bernanke will take all that liquidity out of the system when the time is right. I have no idea where they get this idea; Alan Greenspan certainly wasn’t able to contract the money supply after he inflated it to ward off recession. Do we really believe that Ben Bernanke is going to do any better?

One opinion I read indicated that mopping up inflated money supply. After all, all the Fed had done was monetized the government’s debt. Since that debt is held in the form of US Treasury bonds, it should be easy to contract the money supply again by simply selling the bonds. The author of this opinion was rather misinformed, because they did not seem to understand that when the Fed monetizes bonds, it does so with money that it yanks out of thin air. The money then enters the system by way of the bank. Continue reading Can the Fed Tighten the Money Supply in Time?

“Helicopter” Ben Starts Printing Up a Storm

Just a quick note to pat myself on the back. In a prior blog I wrote:

f Roger is right, and the banks are no longer able to function as the traditional engine of inflation, then I’m sure Ben is prepared to either go around them to offer credit to consumers directly. Such a scenario could take place in a variety of ways, with the most likely being that Fannie Mae and Freddie Mac start offering 4% 40 year mortgages and refinances straight to consumers. Since both of these lending institutions have now been nationalized, relatively few people would need to be involved in that decision. Fannie and Freddie create the money to give to consumers, and the Fed buys the notes. Voila, inflation.

Today, gold rallied strongly as Ben announced that the Fed:

will spend up to $300 billion over the next six months to buy long-term government bonds, a new step aimed at lifting the country out of recession by lowering rates on mortgages and other consumer debt.

At the same time, the Fed left a key short-term bank lending rate at a record low of between zero and 0.25 percent…

The Fed also said it will buy more mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac to help that battered market. The central bank will buy an additional $750 billion, bringing its total purchases of these securities to $1.25 trillion. It also will boost its purchase of Fannie and Freddie debt to $200 billion. Continue reading “Helicopter” Ben Starts Printing Up a Storm

Conspiracy Theories That Surround The Federal Reserve: Part II

My last entry explored the popular conspiracy elements contained in G. Edward Griffin’s The Creature from Jekyll Island: A Second Look at the Federal Reserve In part two of this series, I’m going to be looking at the particular conspiracies that I have come to accept as part of the formation of the Federal Reserve.

The period of American history that is crucial to understanding the formation of the Federal Reserve is the last 1800s. Unfortunately, this is a period of American history where most Americans are completely ignorant. US history as it is taught in most schools pays scant attention to this period in history. The US History most of us learn in school spends most of its time discussing Colonial History, the Revolutionary War, the Civil War, and Cold War. No major wars occured during the late 1800s, so its just not considered worth spending much time on. If anything, the only time this period in history gets mentioned is by Democrats trying to remind us how bad this period of time was- back when the goverment’s role was small and bureaucrats and regulators had overrun the nation. This “Gilded Age of the Robber Barons” (as they term it) was surely a vicious time that we can’t afford to go back to.

I derided this attitude in a prior blog, “Who’s Afraid of the Big Bad Robber Barons?” The people who attack this period in history most, tend to be those who understand it the least. The Industrial Revolution was underway during this period and society was in upheaval.The United States was becoming a mammoth industrial power and the real wages of the working man increased dramatically; real wages for labor have only stagnated since, so let’s not be too hasty in our condemnation of this era of the Robber Barons. The foundations of the nation we would become today were all laid during that period. Continue reading Conspiracy Theories That Surround The Federal Reserve: Part II

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.

You Loaned HOW MUCH?

By now, we’ve all heard about the about $750 billion bailout passed last month, but what is making news now is that Federal Reserve’s own efforts to save the banking industry. Specifically, it has been revealed that since September 14th the Fed has loaned out $2 trillion. Ponder that for a second. While the $750 bailout was kicked about back and forth between the two houses of congress and President Bush and well as both Presidential candidates weighed in on it, the Federal Reserve was loaning (i.e. making money out of nowhere) money that was far in excess of that. Who did they loan it to? They’re not telling. Bloomberg has sued the Federal Reserve under the Freedom of Information Act to see if they can get the court to force disclosure of the information. 

Let me break this down in terms we can all understand. The Federal Reserve is a privately owned institution. Who owns it? The member banks do. So the bank-owned Federal Reserve has created money out of nowhere and lent it to the banks against various form of collateral the banks provided. In essence, the Fed is merely obeying the wishes of its master, the banking industry. The American people have been convinced that the Federal Reserve works for them. In fact, most Americans believe that the Federal Reserve is part of the Federal government; it does have “Federal” in the name after all. But the Fed isn’t for the people. It is for the banks. The banks own the Fed, and the Fed is now serving them far better than anyone else could. Oh, and as for the collateral that’s been offered to the Fed for all of these loans, they’re not telling us that either. 

I’ve been studying the Fed for years, and this amazes me. Not that the Fed would do something like this, but the idea that this is allowed to go on in front of all of us and hardly anyone makes a mention of it is just astounding. And what really kills me is that all that money that the Fed is creating is the liability, not of it, but of the American taxpayer. If you write a check, then it’s your liability that your bank must make good with (ideally) the money that you have in your account. These loans that the Fed have made must be made good by everyone else. In essence, the Fed is allowed to legally counterfeit- to print up unlimited quantities of notes that are someone else’s liability. And who owns this fantastic money making machine? Not the people, but the banks. 

I guess I’d be hoping that we the people would be more incensed about all of this, but few people seem to care. In the last Presidential election, the Libertarians were the only major party to be taking about the dangers of the Federal Reserve and the fiat money system, and they got even fewer votes than Ralph Nader. The American system of government has been throughly perverted. Instead of fearing the obvious abuses of power that we are currently witnessing by the Federal Reserve, many people seem to have become seduced by the idea that Barack Obama can somehow make everything OK. This is insanity.

The Central Banks Have Spoken

Four central banks acted in concert today to each lower their benchmark interest rates by 50 basis points (that’s half a percent to you and I). That leaves the Federal Reserve’s rate for overnight lending at just 1.5%. The central bank of Japan applauded the move, but couldn’t go along with a 50 basis point cut itself because to do so would be to return to an interest rate of zero. In a statement that seemed designed to both drive sales of my book and prove that Keynesianism was far from dead, chief economist at High Frequency Economic in Valhalla, New York, Carl Weinberg said, “We are now looking at the first page of the global- depression playbook. The only solution is to cut rates as close to zero as you dare… pump money into the banking system…hand over fist… and increase government spending.”

So there you have it folks. It turns out that the Vapors had it right all along. We really are turning Japanese– the whole world this time. I don’t suppose it occurred to Carl Weinberg or anyone in power that Keynesianism doesn’t work. Despite following the Keynesian playbook as closely as possible, Japan remained in a depression that still hasn’t really lifted to this day. Not to mention it didn’t do much for us when we faced our own depression. Never before have I seen a theory be so utterly disproved time and again, yet continually embraced as the truth.

It’s not like economists haven’t known. When Keynes first introduced his ideas he had a number of detractors. Keynesian theory was beautifully destroyed piece by piece in Henry Hazlitt’s Failure of the New Economics and that was originally published over 40 years ago. In that book, Hazlitt goes page by page through Keynes’s General Theory and points out the logical fallacies, the ever shifting definitions, and where he makes a prediction that flies in the face of what we know of the world. And yet here we are, decades later, ready to dust off Keynes’s playbook yet again to see if it can bail us out of this predicament. A predicament that was arrived at precisely through following Keynesianism to begin with.

It would seem that we are incapable of learning as a people. That somewhere in our genetic code we are hardwired with the desire to believe that we really can get something for nothing. Paper money systems have been tried many times without history and always ended in failure. Yet here we are trying it again. Convinced we can do it this time because we have a theory that, though flawed and easily disproved, contains enough math to choke a horse. Anything that is expressed in the form of calculus seems to escape our understanding, and when the professor gets finished filling up the black board with incomprehensible symbols and equations, he turns to us and says, “See. You can get something for nothing. Fiat money can be printed with no limit and interest rates lowered to make money cheap for everyone.” It’s a lie that we want to believe.

That we are faithfully following the road to the poorhouse is tragic, but there’s little we are do about it except prepare ourselves as individuals. Buy gold. Gold stocks were up 15% today alone. The market seems to know that when the world’s central banks are acting in concert to destroy their money together, gold is the logical place to turn. I’ve made a rather tidy sum on that move today, and I feel certain that this is just the beginning. As the system gets worse and more money gets printed and thrown at the problem, gold will just become increasingly attractive. The physical demand for it is already so intense that the gold coins are getting increasingly hard to find with bullion dealers. I believe that not only will the situation get worse, but that there is a very real possibility that the government may move to limit people going into gold. Get yours while you still can.

In terms of investment opportunities, I feel that the stock market is still a poor buy right now. It has further to fall when measured in real buying power. US government bonds are still yielding less than 2% for bonds under two years. That’s a rate that’s less than heavily doctored official inflation figure that the government has trotted out. The reason the yield is so low is that if investors with lots of money to protect are worried that the US banking system is so unstable that they can’t leave their money their. So they instead plow their money into short-term government bonds knowing that they are at least guaranteed to get their money back.

Other bonds can be attractive short term investments. I bought $20,000 worth of bonds in Citibank that are set to expire in one month. The effective annual yield on that purchase was over 27%. So there can be some profit opportunities in corporate bonds, but there is also some risk there- just ask the bondholders for Washington Mutual. On the investment front, gold is the only thing that I really feel strongly about. For a list of all the different ways you can invest in gold, I’d encourage you to pick up a copy of my book.

Till next time.

This Is Some Rescue

“This is some rescue. When you came in here didn’t you have a plan for getting out?”
– Princess Leia, Star Wars (1978)

And what a rescue it is. What started as a three-page plan to buy troubled assets has grown to a 451 page mess that includes everything from Indian Employment Credits to adding a Seven-Year Cost Recovery Period for Motorsports Racing Track Facility. I guess in the future we know how to get recalcitrant Republican Congressman to reverse course- include more pork. We should all remember for future reference that the government rides to our rescue by way of hurriedly passing a bill no one had a chance to read that includes more spending of money they don’t have.

I’m not sure if this was the kind of rescue that the American people were counting on, but given how they were reacting to this plan (about 90 to 1 against judging from people calling in), it was probably the one that they were expecting. And the thing that no one seems to want to being up is that the government caused this problem to begin with. If not for the government created entities of Fannie Mae and Freddie Mac, we would not have had so extreme a credit explosion in the housing market. If not for the government created entity of the Federal Reserve and it’s nasty habit of keeping interest rates low and solving every problem by throwing more fiat paper at it we would not have had this orgy of credit and speculation to begin with.

Each of these entities was created by the government to rescue the free market:

– the Federal Reserve was created by the government in response to the Panic of 1907 and the desire to have a “lender of last resort” with an “elastic currency” that could bailout any troubled bank.

– Fannie Mae was created by the Roosevelt Administration in an effort to provide credit to the housing market to stimulate the economy. Except that now that had created a government sponsored monopoly of sorts. So in order to fix the situation, they created yet another entity, Freddie Mac, in 1970. 

And here we are, now having to create more programs in order to save our would-be rescuers. Can there be any doubt of the wisdom of Ludwig von Mises in his Critique of Interventionism where he argues that all government interference in the operations of the free market will merely lead to bigger problems later, which the government must then solve with even more interference. According to Mises, all attempts at intervention lead to the same place, Socialism. And here we are.  Watching the Republicans, the champions of the “free market”, back the biggest interventionist step ever proposed. 

Life is full of ironies, but not greater than the ironies of the public sphere. Some hypocrisies are to be expected. After all, this is politics. But I’m sure that the Japanese, who were advised by the Americans to just let the chips fall where they may when their crisis hit, are noticing that we don’t take out own advice very well. But for me it goes beyond irony and hypocrisy that the Republicans continually berate the Democrat’s for being Socialist as they aggressively expand the size and scope of the federal government. To me it proves that the American people have lost the political will to force their politicians to own up to their promises. Thus we are left with people’s perceptions of their government and its actions determined not by the actions themselves but rather what the politicians tell the people their actions mean. According to the Republicans, bailing out a failure caused by three government created entities is merely what must be done to save the “free market” from itself. 

I started this piece with a quote from Star Wars. As a science fiction person I would like to close it with a quote from another piece of SciFi, George Orwell’s 1984. Orwell, like Mises, foresaw the government’s continual encroachment into our lives, just as he foresaw that the government would shape people’s perceptions by telling them that something was it’s opposite. And so I want you to keep in mind our “free market” Republicans, their “War on Terror”, and their often trumpeted habit of being fiscally responsible when you hear that: