Friday, December 31, 2010

Musings for the New Year

Another year has come and gone. We have gone from the year that was called the “Worst recession since the Great Depression,” To “The Great Recession.” The price of oil is up to 90 dollars a barrel and silver just hit 30 dollars an ounce (Ben denied printing any money on 60 Minutes).

The debate in Congress for the coming year will revolve around jobs. Of course the new hires will be off shore where there are no mandatory health care insurance premiums to pay.

Look for a Congressional investigation of the retirement funds, CalPERS will be center stage. A lot of life insurance companies could also be in very bad shape; not many annuity models were built on a 2 percent return on equity.

Several States will run out of funds for operation. Technically they can’t file for bankruptcy but they will be insolvent just the same (a vendor or a citizen can’t sue a state for non-payment). You might have to wait 100 years to get paid. Of course that won’t stop several hundred cities from declaring bankruptcy and adding to the frenzy. This could lead to local governments outsourcing emergency 911 calls to India.

Nationwide, expect the median price of homes to increase -- why buy a starter home when you can purchase a McMansion for 20K more ---with low interest and nothing down government financing.

Several European governments could collapse or repudiate their debts; Greece and Ireland come to mind. The problem not fully understood here, is that the real wealth of these countries is their educated youth. These people will vote with their feet if things don’t change and emigrate to other lands.

Iceland’s repudiation of its debt is kind of like a cat walking in front of a chained dog (i.e. the Euro Union). Will the Germans pay to keep the toilets clean in the rest of Europe? This could become another tea party movement, a goose-stepping one on steroids.

The idea that big is better in business, kind of falls apart during bad times. Fixed costs and tight profit margins can kill you. The A & P Tea Company, one of the nation’s largest grocery stores just filed for bankruptcy. Look for several more big names to file for BK this year.

The commercial loan sector is exhibiting severe signs of stress. A lot of non renewable 2 to 5 year loans are coming due. Bernanke is going to have a rough time trying to wall paper over this mess. More debt to add to the residential real estate bank losses.

Congress will have to deal with Social Security and Medicare. The new medical plan will be called Shaft-care---the Democrats and Republicans will unite together and shaft the silver foxes.

Look for oil to go higher and silver and gold to drop in price. It’s a normal reaction when you need to raise cash. Sell the good stuff and hold on to the dogs hoping they will come back. In reality people should be selling the dogs for what they can get, while they are still worth something. Retirement funds will save the garbage because it stays on the books at cost. Of course Ben and the Banks do the same thing.

Tomorrow brings in the New Year. It will be time to figure out how much we owe in taxes for last year. Thank God that we don’t have to pay for everything that Congress bought, where would we get the money?

Have a Happy New Year everyone, and God Bless.

Copyright 2010 All rights reserved

Sunday, December 26, 2010

Public Education Doesn't Teach Thinking

Lately everyone is blaming our poor education system for the state of our affairs. We are turning graduates out of high school that can’t read or write. I have no problem with that, we need people to man the hamburger stands. If they can get my order right “Double cheeseburger, no pickle,” they pass my education test.

When I went to school (in an era fondly referred to as the “Stone Age,” by my son) everyone had a pretty good idea where they fit in. There were three people that always got A’s on all of their exams, then a few more were B students and the rest of us were C students. There were a few D and F students that were destined to become auto mechanics. On the whole, everyone accepted the fact that they weren’t genius material, but we all knew where we stood in the group; if you had a B or an A in one course, you could think of yourself as “above average.”

The TV and newspapers back then provided the news with very little political content. Being a Republican or Democrat back then was kind of like being a Protestant or a Catholic, it wasn’t a big thing except at election time. There was an unwritten law that one did not discuss religion or politics. It was a waste of time, you weren’t going to change anyone’s views, just piss them off (notice how this hasn’t changed).

The high school students today are not much different than 40 years ago. Everyone gets an A now, so an employer needs to weed out the “Car Mechanics” before they hire someone. The big thing that has changed over time is the inability of people to think for themselves and challenge what they read or hear from the media or their acquaintances. The point I am trying to stress here is that people don’t question the statements made by the media anymore, they quote them and/or shop for the news they want to hear.

The other day an economist on the news, stated that gas prices were increasing because of Chinese consumption. If you make 20 cents an hour, how much gas are you going to buy? Are gas prices increasing or is the value of our dollar decreasing. Am I the only one rising up out of my chair in disbelief of what I am hearing?

A while back, a friend of mine made the statement that everyone on the Federal Reserve Board was Jewish and he even got on the Internet and pulled up the article to prove it. The word “everyone” made me somewhat suspicious. The Aryan Nation is not what I call a non biased news source. The concept of shopping for "documentation" on the Internet makes me cringe.

There is no questioning of the “facts” anymore. The more a “fact” is repeated the more valid it becomes. The idea that one can question these jewels of refined thought and laugh at them, as being absurd, is heresy. Using common sense to disagree with what is accepted by our peers isn’t acceptable behavior. Keep your mouth shut or the others will laugh at you. Our schools don’t teach thinking skills, where you question the material presented. You’re asked only for the right answer to each question.

It brings to mind the Rest-Home-Senility-Test where the applicant is presented with a bathtub half full of water and given the option of using a bucket, a cup, or a teaspoon to empty it with. The right answer is not the bucket; you would pull the plug to drain it.

At some point more of us will start to question the options government is shoving at us. No police services, no fire, no schools, no military, but don't cut one penny of retirement, Social Security or Health care. And if they refer to something as a “No-Brainer,” it is you they have in mind (with no brains) and your wallet is in the cross-hairs.

It's time to start questioning the answers we are being given. California can cut all services and still not balance its budget. But of course Ben Bernanke, "Keeper of the Federal Purse," still has checks in his check book so I guess we are OK for now—if we don’t think about it too hard. We don't want to upset an upside down apple cart--do we? Give it some thought--there really isn't too much to lose if we did, go figure!

Copyright 2010 All rights reserved

Sunday, December 19, 2010

Congress is not a Christmas Solution

Everywhere we turn, someone in a legislative body is passing a law to solve a problem. We have passed a laws handing out free health care, one for retirement benefits, one for a gay military, one for bank bail outs and there are several against drugs. Did it every occur to these lawmakers that laws just regulate people or their entitlements. They don’t solve problems, they create new ones.

The laws dealing with drugs backfire in an unusual way. You get caught dealing drugs, you go to prison. This is really an “Advanced Educational Training Camp” where you learn how to do it right. Plus you can pick up new skills, like lock picking, and identity theft. Let’s face it our high schools just don’t have the resources to offer these courses.

Then we have these wonderful laws setting up retirement plans. They have been working just great until a few people in government started to wonder aloud, where is the money coming from to pay for all of this? CalPERS states that it is making 7.75 percent interest on their investments; do we dare accuse them of lying or just laugh at their claim.

Congress cannot pass a law that will create jobs to replace the ones that were lost; most of those jobs are gone forever. They passed laws setting the minimum wage and demanded more taxes from these rich employers. The net result, whole industries moved off shore to produce their product and then import it. If you want your bread buttered for free, guess what, the butter isn’t going to be there for long.

Now it’s OK to be gay openly in the military. I can’t figure that one out. The last thing you would ever want to do is walk up to a marine and ask him if he was gay (you body probably wouldn’t be entitled to a military funeral). I guess you don’t have to be “A real man” to join the army now (that ought to be a real boost to enlistments). The only reason I bring this up is because of its insignificance. It’s not like half of the voters are gay, they are a very small part of the population and they get a tremendous amount of attention from Congress. The gay population can’t be more than 3% but it is at the top of the “To do” list for Congress. When you think about it, a bill on cancer research would get a “Ho Hum,” but a bill having to do with gay rights will get that Congressman’s name in the paper with a photograph. This program could work out real well with the Navy; the sailors wouldn’t have to come home every 9 months to be with “loved ones.”

Congress also reduced the Social Security tax by 2%. My only question is why? Isn’t this supposed to be money saved towards our retirement? (of course the Supreme Court said that it was a tax and not a retirement plan) So you get to spend it now instead of later—all $400 of it. It is very hard to raise taxes, and even when it has been done, and then reversed later in time, you feel the burn a second time, for the same thing. We know that Congress needs to raise taxes, but they seem more like clowns running a circus; “Vote for me, and get a free ride.”

The thing we really need to ask ourselves, are all of these new laws constructively solving our problems? The second question we need to ask, can they accomplish the task? The third question you need to ask is where is the money coming from? And the fourth question, does anyone really understand the bogus financing? If you have read this far, you know your up to your neck in quicksand, but hey, this is only a dream---- waking up could be a real nightmare.

Santa is coming to town next week and surprisingly he doesn’t look a bit like a Congressman. Just maybe we need to think about what we need for the coming New Year and sadly it is jobs. All I can suggest is help someone you know in need; God Bless and Merry Christmas to all.

Copyright 2010 All rights reserved

Saturday, December 11, 2010

The Gold & Silver Shortage---A Future Brick Wall

Commodities are the only game left in town. This is the one market that Ben can’t effectively control. And this could be his downfall. The real cost of borrowing money is zero if you factor in inflation. This has a win win effect for investors buying futures. In simplified terms, the future price of a commodity future one year out would have a premium. It would be the interest on the money for the term of a year, needed to purchase the commodity on the spot market, plus storage costs over the year before delivery. So a free ride with interest charges, with incidental storage costs and an add in for the volatility cost.

Commodities as a whole are rising in price. A lot of it is inflation related. Since there is no cash return for dollars in the bank; commodity speculation is the new frontier open to abuse. In the futures pit, one trader will sell the future delivery of one million barrels of oil, say for November 2011. At the maturity date for that trade, the seller delivers the oil or buys his contract back. All contracts are matched buyer to seller. If you are speculating, you never want to take delivery. The speculator sells naked contracts for delivery if he believes the price will drop and he buys contracts when he thinks they will increase in value. This person will close out the deal by selling or buying the opposing trade back. Margins are as low as 6 percent. So to control one million in gold, you need 60K in face money.

The commodities market has a valid justification for its existence; it helps take the risk out of business ventures. An airline would buy jet fuel futures a year or two out to limit upside costs. The company is not sure what the future market price will be, but buying a futures contract for later delivery, locks in their costs. If a gold company has production costs of $800 an ounce and plans to produce 1000 ounces of gold, they would sell 10 futures contracts for delivery say 6 months out at $1300 an ounce. This guarantees that they will meet their payroll and keep the bookkeeper happy.

For every 100 futures trades, only 10 are real (a commodity actually changes ownership from one holder to another). All the rest of the transactions are speculation. A problem can arise in the futures market if the prices take off. All of the buyers of gold and silver futures might demand delivery---especially if the price increased dramatically.

The Hunt brothers tried this in the 1980’s and successfully cornered the silver market. They were buying it and taking possession. Needless to say prices took off. The Hunts had a legal corner on the market and it was about to ruin a majority of the Chicago Board of Trade (who were opposite the trade). So the CBOT changed the rules on the Hunt brothers and limited the number of contract that could be held, to 10 million oz and all contracts over that amount, had to be liquidated. Naturally that saved the ass of every scumbag CBOT trader and bankrupted the Hunt brothers.

With a little thought, it doesn’t take much Gray matter to figure out that one can run the futures market with only a small amount of real gold changing hands, and at the same time have several million ounces of contracts being traded daily.

Many people have their gold and silver stored in bullion banks. IMHO, I don’t think even one of those banks could payout on a modest 10% run on the bank. That’s why it takes up to 30 days for delivery when you request it. They have to go out and buy it on the open market.

The question we need to ask is “Have we built a gold and silver bubble, or is this perceived increase in price, a measure of how bad this quantitative easing has gotten?” The futures market could turn into a tar pit if everyone decided to take delivery of their gold and silver.

Bernanke has tinkered with reality. Maybe, its gold and silver’s turn to tinker with Ben’s QE2. Do you know where your gold and silver are? They might not be where you thought they were.

The $20 coin at the left, was in circulation 100 years ago and has kept its value quite well. The old money is no longer in circulation; it's worth quite a lot more than the 20 dollar bill it represents today, go figure.

Copyright 2010 All rights reserved