Manarin Investment Counsel, Ltd.

1. The Conference Board's index of leading economic indicators has risen for two months in a row.
2. Producer prices have increased for two straight months.
3. Consumer prices rose in January - the first monthly gain in six months.
4. The Baltic Dry Index, which measures the cost of shipping key raw materials like copper, steel and iron, has more than doubled from its recent lows.
5. Existing-home sales rose in December, and participants in our weekly survey think that another rise took place in January.
6. Pending home sales went up in December.
7. Builders' confidence inched up this month.
8. Thanks to lower interest rates, applications for both new mortgages and refinancings of existing mortgages are rising.
9. Real hourly earnings rose 4.5% in December following a 3.3% increase in November.
10. An index of consumer expectations rose in January.
11. Retail sales shot up by 1% in January - the first monthly rise since June.
12. The decline in consumer credit moderated in the latest month.
13. New orders for consumer and nonmilitary capital goods went up in January.
14. The ISM index of manufacturing went up last month.
15. The ISM index of services rose last month for the second month in a row.
16. The money supply is soaring, a sign that there's plenty of liquidity in the economy.
17. The 3-month London interbank offering rate, a measure of banks' willingness to lend each other, has dropped to 1.2% from close to 5% a number of weeks ago.
18. Other measures of the state of the financial markets, like the TED spread and the 2-year swap spread are down, as well.
19. Prices of credit default swaps for banks have fallen from their peaks.
20. The corporate-bond markets are thawing out, too; some $127 billion in dollar-denominated debt was issued in January, the most for any month since last May.
21. Some securities on banks' books are starting to recover in value.

From Irwin Kellner at MarketWatch.com

 

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Chicago - Any recession is a cruel event, and this one may turn out worse than most.  Many Americans are suffering, and their numbers are sure to rise in the coming months.  But recessions are also an inevitable part of the economy, and they do end up being reversed.  Since 1945, the average length of a downturn is 10 months.  This one will not last forever, and growth may well resume this year. 

Nor is it likely that the current crisis could turn into anything resembling the Great Depression.  The Federal Reserve has acted quickly on a vast scale to prevent the brutal deflation that occurred in the 1930s.  Bank deposits are insured, and people who lose their jobs can count on far more help than was available then, in the form of food stamps, unemployment insurance and welfare. 

In some ways, the downturn may do the economy some long-run good.  Like every recession, it has forced companies to cut costs and operate more efficiently, which will raise productivity.  It has boosted the puny American savings rate.  It has begun a transition away from overinvestment in housing, freeing capital for other sectors.

It has brought down inflated home prices.  It has caused banks to exercise more care in lending, while discouraging Americans from resorting to credit to live beyond their means.  But these changes are a big adjustment, and they won't happen without pain.

Some critics think it's dangerous for a president to make dire predictions, lest he spook consumers into hysteria.  That fear is also greatly exaggerated.  When major companies are filing for bankruptcy, the stock market is sliding and home values are falling, Americans feel poorer - because they are poorer - and nothing their leaders say is likely to have a big impact on their mood.

For the time being, the most important asset Americans have is patience, keeping in mind that bad as they are, things will eventually get better.  Bankers and investors will tire of putting all their money in low-yield Treasury securities.  Credit will thaw.  Home prices will stabilize.  Consumers will come out of their shells.  Sales will pick up.  Companies will dare to hire again.

 

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When you take out the government-speak and insert common sense language, stimulus simply means "create more money out of nothing." 

More on this in the video below:

 

What this all amounts to is a growing inflationary risk.  The negative headlines you see today are primarily deflationary driven.  Eventually the massive amount of money created by the Fed (an effort to avoid deflation) will spread throughout the economy thus devaluing all existing dollars in your pocket.   

As the U.S. dollar makes its downward plunge, gold and other assets NOT created out of thin air will likely be the winners.  But one should not get in over their head with this precious metal or any other non-dollar asset class since it's obvious the economy is becoming more saturated with Washington's policies. 

And if ever you have felt that our financial lives can be improved with politics, here is a must-see video for you.  In it Congressman Pete Stark attempts to explain how America's wealth grows as the national debt grows.

*Note: The Congressman quickly becomes angered with some of the reporter's basic questioning and uses foul language so view with caution. 

Now back to the main point ...  

As a long term investor, you cannot eliminate investment risk but you can manage it and the only method to accomplish this that allows me to sleep at night is broad diversification.  We can't control the daily happenings on Capitol Hill but we can be informed about the financial consequences that stem from political actions. 

Bottom line, these stimulus packages we've seen are nothing more than crafty smoke and mirror programs.  Unfortunately the typical citizen thinks the government is the one cutting the check.  

LESSON OF THE DAY: Governments have debt, not capital. 

It's you and I who are covering the bill and we will pay dearly in the years to come by way of increasing taxes and constantly depreciating dollars.    

"Sometimes I wonder whether the world is being run by smart people who are putting us on...or by imbeciles who really mean it."  - Mark Twain 

 

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For years many of you have heard me say that the stock market is like a yo-yo climbing a flight of stairs.  Here is a fun, visual take on the same concept with an emphasis on the fact that average market returns are anything but average.

Via Get Rich Slowly  

 

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Eight simple questions will show where you stand on the political spectrum.  Take the quiz here. 

 

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The below video is a follow up to this recent post showing America that many leading economic minds strongly disagree with the government's stimulus plan. 

 

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The strangest thing happened on Friday.  It was reported that the U.S. economy lost 600,000 jobs in January and the unemployment rate jumped to 7.6%, but the stock market rallied anyway.  Partly, this was because the stock market is a forward-looking indicator and employment is a backward-looking indicator.  If the economy is near a turning point, the stock market will reflect it well before the employment report.

But there is another explanation -- one that is believed by most of the journalistic punditry -- and that is that a bad employment report make a stimulus package more likely.  As Christina Romer (Chairwoman of the President's Council of Economic Advisors) said on Friday, "these numbers...reinforce the need for bold fiscal action."  What's interesting about this is that there is absolutely no long-term economic evidence that higher government spending creates jobs.

From Brian Wesbury's article in The American Spectator

 

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Hat Tip:  Carpe Diem and ReasonTV

 

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Financial Times - When Richard Nixon destroyed the Bretton Woods International Monetary System in 1971 by closing the "gold window" at the Treasury, he severed the last link between dollars and gold.  What followed was a spiraling proliferation of increasingly spurious credit instruments denominated in a debased currency.  The most glaring and lethal example of this madness has been the growth of the unregulated derivatives market, which has ballooned in size to $600,000bn, the equivalent of almost $100,000 per person on Earth.  

The Bretton Woods collapse severed the link between the world's currencies and gold.  Central banks were then free to create as much money as they wished.  Between 2001 and today, central banks outside the US created the equivalent of about $6,000bn.  This can be seen in the seven-fold increase in foreign exchange reserves in that period.  The money created (which accounted for most, if not all, of Federal Reserve chairman Ben Bernanke's so-called global savings glut) was used to buy dollars and suppress the value of the currencies of US trading partners to perpetuate their trade advantage.  

When those dollars were reinvested in dollar-denominated assets, it was America's turn to bubble.  As central banks bought up US treasury bonds, they drove up their price and drove down their yields.  However, there were not enough new Treasury bonds being issued to absorb the rest of the world's trade surplus earnings, so central banks bought Fannie and Freddie debt as well.  That allowed those government-sponsored enterprises to acquire or guarantee more than half of all the mortgages in the country before they failed.  Between unnaturally depressed interest rates and the buying spree by Fannie and Freddie, US property prices surged.  The US housing bubble followed the ill-fated Nasdaq bubble.  However, the inflation of the US housing market was one bubble too far.  When it imploded, the global financial system was hurled into crisis, leaving the 21st century version of Anglo-American financial capitalism discredited.  

The lesson that must be learnt from this disaster is that "free market" capitalism under a fiat money regime does not produce the same blessings (sustainable prosperity) that are produced by true free market capitalism within a monetary system anchored by gold.  

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Review related articles on gold we've published.

 

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