April 16, 2011

So much is happening as we speak regarding regulation and the markets that I wanted to cover as many of these hot topics as possible this week.

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The Dodd-Frank Wall Street Reform & Consumer Protection Act is now being written and will be implemented soon.  Here is a glimpse of what awaits us: 

 

Among the new regulations being written are twenty pages needed to define what just two words meant in the document. If this is any indication—we are about to see a nightmarish new set of regulations descend on business and financial institutions everywhere.
 
Imagine 300 new regulations hitting the books simultaneously. Where there are now two or three regulators to answer to in any one area, there will be thirty new regulators to deal with.  Businesses and financial institutions are used to working with and establishing a one-on-one rapport with their regulators in order to decipher exactly what it is that they want.  How will that work when it is thirty regulators to every one today?

 
Alan Greenspan had a lot to say about the new laws in a recent Op-Ed article.
 
"The act may create the largest regulatory-induced market distortion since America’s ill-fated imposition of wage and price controls in 1971…The problem is that regulators, and for that matter everyone else, can never get more than a glimpse at the internal workings of the simplest of modern financial systems...In the most regulated financial markets, the overwhelming set of interactions is never visible."
  
Combating this lack of transparency with more regulations and regulators threatens to cause such distortion, confusion, and chaos in the business marketplace, that there is a chance it will bring the entire system to a slow crawl.
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The initial 6 pages of healthcare regulations to be imposed on doctors and insurance companies have finally been written into law.  Only now it is 429 pages!  This is not a Healthcare Reform bill, which we all agree is needed.  It is an Insurance Reform bill that dictates to insurance companies who and what they must insure.  It does nothing to get costs under control; on the contrary costs will go up. There have been over a thousand waivers given to avoid the cost effects of this bill--most Americans agree that we might as well waive the entire thing and start over again.  Maybe next time we will get it right?

 

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There is more talk of revamping the international monetary system in order to make it more diverse and less dollar-dependent. To this end the Chinese are asking that the yaun be placed in the basket of currencies which define the SDR.  To this request the following response was given on behalf of the US by Treasury Secretary Geithner who agrees that the yuan should be included in the basket of currencies used for SDRs--but with a caveat.

 

"Over time, we believe that currencies of large economies heavily used in international trade and financial transactions should become part of the SDR basket…To achieve this objective, the concerned countries should have flexible exchange rate systems, independent central banks, and permit the free movement of capital flows."

While I am totally against any enhancement of the SDR, I must admit this is a tempting offer. China would have to allow free trade and end capital controls which currently hinder money coming to the US in search of our imports. Sounds reasonable to me, as long as we keep the SDR from increasing in quantity.

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Both chambers of the U.S. Congress have approved legislation that would eliminate the controversial new Form 1099 tax-reporting requirements that coin dealers and other business organizations had complained was onerous. The measure is now on its way to the desk of President Obama after it passed through the Senate passage with an 87-12 vote Tuesday. News reports suggest that the White House is expected to sign the bill into law.


As I talked about in my article "Gold Clause”, this was one of several buried regulations hidden in the healthcare bill.  It has taken a literal act of Congress to repeal it.  Hopefully they will go the rest of the way and repeal the entire bill. We still cannot determine how many other hidden agendas are in this bill.

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According to a new Shiller report profits rose faster coming out of this recession than at any time since 1900.  It took 19 years to recover to previous highs after the Great Depression—but only 50 months today.  Debate continues between those who claim this is an inflation induced stock market rise or a world growth/export led rise.  My view is that it is mostly a natural healing of the financial system together with a falling dollar that has benefited the export industry.  Regardless of your take, we can't escape the fact that so far, corporate America has been faring much better than individuals on Main Street USA.
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Over 200,000 jobs were created last month.  While that is a great headline, the real news is that these jobs were created in the private sector while 14,000 jobs were lost in the government sector!  This is a major reversal. What changed?  The 1.2 trillion dollar stimulus program ran its course. Now real jobs can be created rather than expensive phony ones.
 
A study just completed by the joint economic committee in Congress was cited by Representative Kevin McCarthy. Included in the forty year study were 107 countries. The countries that actually cut government spending—grew jobs.  If the trillion dollar stimulus program Obama put in place had worked we would have seen employment go up. Regrettably it went down. Since the program has ended, job growth has increased, disproving the Keynesian assumption that it is government spending which creates prosperity.

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Reportedly six trillion dollars in the form of individual savings sits in totally liquid accounts making no interest to speak of.  This is scared money that no longer trusts the markets.  Potentially this money could come out of hiding and be invested in stocks, gold, or silver. 


Of note: silver is being looked at by many individuals as the possible future coin standard to replace or supplement dollars as a medium of exchange.  Thus the stunning increase in silver prices VS gold this year.  The greatest demand is for physical possesion.

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US exports to other nations have hit an all time high.  As has been pointed out in previous articles here, this may be what’s behind the continuous rise in the US stock market.  Profits of corporations are up and cash balances are huge.  The stock market has risen along with the increase in exports. The key right now is to be in the stocks of companies who are producing what the rest of the world wants.
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And finally, I need to say a few words about the President’s budget, proposed on Wednesday. This week Barak Obama, proposed his own budget, which differs from the House (Paul Ryan) budget in two fundamental ways: it raises taxes, and it preserves Medicare which is the main source of our problem, whereas the Ryan budget reduces tax rates and eliminates deductions and loopholes, and switches to a voucher system for those 55 and younger once they retire at 65.

I will not make the economic arguments here, but the most striking feature of the President’s speech wasn’t in the economics. It was his constant references alleging that the Paul Ryan budget takes from the poor and gives tax breaks to a few millionaires and billionaires and calls this a fair bill. “That is not the vision of America I have”, he said. In framing the debate in these terms, Obama has thrown down a gauntlet. He is willing to argue his case not just on practical grounds, but on moral grounds. This is a gauntlet I am willing and eager to pick up. I will in future articles be glad to debate the moral contention that this nation was built on the concept that we the people are our brother’s keeper; that it is the moral duty of the rich to care for the poor; and that it is this premise that makes America great. To be continued at a later time…

Market Update:

While the metals continued strong this week, several of the stocks lost momentum and many fell on profit taking. Silver, the metal, is extremely strong, and in my opinion is gaining momentum on the prospect that silver coins will at some point be used as money once again. At today’s prices, a silver quarter is worth ten dollars. Can you imagine throwing down a few quarters or a silver dollar to pay for your weekly groceries? Evidently, somebody can.

Amazon mining ran to new highs this week. It is a potash play, with a unique position in the marketplace. It is now my number one holding. It is up over 60% from where I bought it just a short time ago.

Cash represents 48% of my portfolio, with amazon standing at 13%, and stocks declining in weight to 7% at the bottom of a notably shorter list.

Portfolio by weight:

Cash (defined as gold, silver, and dollars)

Amazon Mining

US Silver

Rubicon

Copper Fox

CDE