The Rag Reel


Monday, March 7, 2011

It's called Inflation!

We have a bull market alright!
The Weed Keeps Growing

In October of 2009 cotton was 0.80 cents/pound; on March 4th 2011 cotton was at $2.20/pound. That is a tripling in the price of cotton; and obviously this doesn't happen without a lot of money creation from the central banks. Cotton is up 190% since last fall; does anybody not think that's cause of inflation and thats going to feed through to the price of clothing? Everything uses cotton; socks, t-shirts, underwear, blue jeans. Of course it's not just cotton, it's all fabrics that are getting expensive; so you can't substitute some other material for it. This is just one example of the true cost of increase money supply.

Rising food prices is not the story, it's rising money supply that's the story; which is the reason food prices are rising. It isn't a coincidence, that prices of food is surging to record highs at the same time as money supply's are expanding to record highs. There is a cause in relationship between QE1 and QE2 and whats happening with prices. It's not like all these high prices are a surprise; it's exactly what you would expect based on the monetary policy of the United States. The reason why inflation is global is because the United States has the world reserve currency. What the U.S monetary policy direction is, affects the monetary policies of every other currency so long as the dollar remains the world reserve currency.

3 scapegoats

Scapegoat number one : the weather. The weather has nothing to do with it, there's weather every year. There's always problems in the weather; someones got a flood, drought, freeze.... It happens every year. In the old Soviet Union (Russia) was the bread basket of Europe. When the communist system came in, every year produced a bad harvest and every year they blamed the poor harvest on the weather. It wasn't the weather, it was the communist system that destroyed the incentive of farmers to farm. It is not weather related these surging prices across the board. It's not just this commodity (Wheat) that's rising, it's all commodities that are rising. So the weather is affecting every crop on the planet? Come on.

Scapegoat number two : demand in emerging markets: well we have had demand in emerging markets for centuries; they've been eating for centuries, they didn't just show up. What's changed? Answer : whats changed is all the money they have to spend on food because all the money that central banks are printing.

Scapegoat number three : Speculators. Where are the speculators getting all the money to speculate? Answer : from the FED; the critics are not pointing the finger at the real problem and the root cause of global inflation. It's Ben Bernanke, the money he's printing, it's President Obama and Congress that are spending money; the debt that they are issuing that Ben Bernanke is buying. This is a direct consequence of economic stimulus; that's why the world is suffering and that's why Americans are going to suffer in the future!

If we don't make the connection of printing money and rising prices; then it's never going to stop. It seems like it's so obvious, that it's such a obvious connection. If we have more money, then money is less valuable; so prices have to rise. If we keep blaming the inflation problems on the weather, speculators, emerging markets; we are going to keep blaming it on everything but the actual cause which is the Federal Reserve and the deficits that are being created by congress that forces the FED to monetize. They're not required to monetize but we have a FED chairman with no guts!

Global Economy / Global Problems / Naughty FED!

First off, the global economy has been growing; theres currently 5 billion people on the planet. More people are alive today than in the past but this growing trend has been in place for centuries; yet we've never had this "problem" with food. The thing is with more people on the planet means not only more people eating but also more people farming. Also, with advances in science and technology their are more advanced means in growing food with less input. It's not like you've had this huge explosion in people in the last 2 years, no; whats changed is this huge explosion in money supply. Whats changed is the FED's balance sheet being blown out of proportion. What's changed is all these foreign reserves of all these emerging markets central banks printing money to buy up all these FED printed dollars like it's going out of style. That's what's different from now and a couple of years ago; that's why prices are shooting through the roof.

Why doesn't the FED see this you ask? Answer : the FED is not missing it, the FED is just closing it's eyes. The FED doesn't want to acknowledge what they see, because they don't like the picture that's being painted. If the FED admitted it sees inflation, the reaction to that is having to raise interest rates. The minute the FED has to raise interest rates the economy tanks. The only reason why the economy is not tanking already is because it's on artificial life support already by the FED. The trade off consequence of that is to keep this phony economy going, to keep these banks afloat,  to keep the real estate prices high we have to create inflation, we have to make prices go up. The FED doesn't want to say that's the trade off; the FED doesn't want to admit they've made a deal with the devil and these are the consequences. So they ignore inflation, they lie; but the problem is they loose all credibility when they look at all this inflation and say it doesn't exist. Of course it exist, but they don't want to deal with it. They don't want to have raise rates, they don't want to force politicians to make real cuts.  The problem is we need to get this recession out of the way; the recession is part of the cure. In less we allow the economy to restructure in a way that will create a solid foundation, we will never build a lasting economic recovery; that is the point!

QE2 Failure!

The main goal of QE2 was to bring long term treasury rates down and instead they went up! So, the FED has already lost control of long term rates; noticed in the rising rate. At some point the long end yield curves will get out of control. When the FED loses control of short term rates; is when it will be forced to monetize not only treasuries but other short term commercial paper. Because at some point when inflation gets so high, nobody will want to buy any short term paper and then what is the FED going to do? If the FED doesn't raise rates then nobody will be able to borrow cause the current rate for borrowing is 0%; unless the FED lends to everybody and then of course the FED becomes the buyer of only resort and not the buyer of last resort and that's it for the dollar index! If the FED raised rates right now then the recession will start right now and that would be bad for any political representative trying to get re-elected like the President. Because when it comes to politics it's all about postponing, delaying, even if the delay exacerbates the problem; that doesn't bother a politician. A politicians biggest problem is getting through the next election. He doesn't care how much long term damage he does to the economy in reaching his own goals. Unfortunately the central bankers are working in partnership with the politicians, they're buddy buddy; they're helping them get re-elected instead of being the independent central bankers they were appointed to be. The central bankers are not playing the role of the adult in the room. Instead the bankers are the life of the party, they've got the lamp shade on their head and they're spiking the punch bowl! There is a party in DC and I haven't got a invite.... 

Uncle Ben is Numb to Global Inflation

Thursday, January 6, 2011

The Loss of Prosperity!

Taking Notes!  

“We could be facing the greatest loss of liberty and prosperity since the 1930s." – Some Degenerate. Sad to say, that prediction is coming true. We now know the U.S. economy has been in recession for more than 3 years. Most of the world's economies are still suffering from the effects of that crisis, with no end in sight of the spread of this govt. induced disease. When trying to overcome such dire economic circumstances, it is essential to learn from what has and has not worked in similar circumstances in the past. And we need to not only remember, but to understand the past.

History lesson

   The closest parallel to our situation today, both economically and politically, is the early 1930s. Although there are differences, there are striking similarities. In both instances, free markets were blamed for problems caused by misguided government policies, which led to additional interventions. This ratcheting up of interventions led to long-term economic decline. For example, the U.S. Federal Reserve began a “monetary expansion” in 1927. This led to a stock market bubble, which the Fed, in 1928, felt it needed to pop. The resulting deflation, combined with the anticipation of other interventions, caused the stock market to drop nearly 50 percent in just two months.

   If these interventions had been avoided, there is no reason to believe we wouldn't have escaped with a short-term, if severe, market adjustment rather than an historic depression. Instead, having caused a crash, the government quickly began looking for others to blame - especially bankers, brokers and businessmen. Sound familiar? Getting it wrong!

   Far from being a champion of minimal government intervention in markets, as is commonly believed, President Herbert Hoover launched the most interventionist economic program in U.S. history. Hoover supported record income tax hikes and devastating import tariffs. He also initiated an explosion in government power by creating massive new programs. Far from helping, these programs created a destructive “uncertainty” that discouraged investment and entrepreneurship and contributed to the decline.

   Unfortunately, most of us (and our children) have been told or taught just the opposite that Hoover was a laissez faire President who let unregulated markets get out of control. Nothing could be farther from the truth. Making matters worse, when Franklin D. Roosevelt came to power after Hoover, he compounded the uncertainty by pursuing a change policy of "bold, persistent experimentation" to end the Depression. This approach, instead, extended and amplified Hoover's mistakes. FDR's actions fundamentally changed the government's role in the economy, and prolonged and deepened the decline.

   Rather than following the philosophy that government "can only exercise the powers granted to it" by the U.S. Constitution (as expressed by Chief Justice John Marshall in 1819), Roosevelt changed it to one in which the government has all powers not expressly forbidden by the Constitution. Prior to 1936, U.S. federal regulations covered 2,600 pages. By adopting Roosevelt's philosophy, they have since mushroomed to 72,000 pages. Non-defense spending skyrocketed as dozens of new government agencies (many of them still with us today) were created and most of them are un-necessary wastes of tax payer funds.

   Personal income tax rates increased and new taxes, including corporate "excess profits" taxes as high as 90 percent, were imposed. The Great Depression saw the most far-reaching and abusive use of executive privilege in U.S. history. FDR issued 3,466 executive orders, nearly as many as the combined total for all his successors. Our current President, Barrack Obama is almost a reincarnation of FDR and his policies.

What did all that spending, regulation and intervention accomplish?

   None of it, including Roosevelt's massive public works programs - solved the problem. In fact, under FDR, unemployment was still more than 23 percent at the end of 1934, and remained at double digit levels until World War II. Businesses, faced with the uncertainty created by invasive and ever-changing government policies, curtailed investment. Thus, share prices remained low. (The stock market did not recover to pre-crash levels until 1954.) The only reason the U.S markets are performing strongly is due to the FED’s position of pumping liquidity into the system, which is artificially creating a Bull Market and false optimisms among the masses.

Tough lessons

   The responses we've seen to today's economic crisis make me wonder if we have learned anything at all from the sobering lessons of the past. Once again, our government has allowed a “yo-yo” monetary policy to distort economic reality and wreak havoc on the stock market. Once again, massive government interventions - including bailouts, takeovers and make-work programs - are being offered as the "solution" to our economic problems. Once again, leaders are suggesting we can solve the problem by creating even more government agencies while piling on even more regulations. Once again, the government - rather than the market - is picking who wins or loses.

   It is markets, not government, which can provide the strongest engine for growth, lifting us out of these troubling times. If we are foolish enough to ignore some of the most painful lessons of history, then we will almost certainly make the same mistakes on a devastating scale. In the new year of 2011 we have a crack in the door that if taken advantage of can open our country up to the realities of the past 4 years and allow the U.S.A express to get back on the tracks! With new leaders in office this could be the last opportunity we have to get the country back to its original promise to the American people, Freedom!

Monday, January 3, 2011

Bond Market Implosion!

We will have those Inflation Blues again!

Inside the Fortune Cookie

   Consumer Prices in China have risen to 5.1% annual rate. The Producer Prices are rising better than 6% per year and beneath the surface if you look at food prices, food prices are up almost 12% in a year in China. That is a huge rise in cost of the most basic of all commodities food, and obviously the Chinese government has it’s hands full dealing with all the inflation which is largely a consequence of it’s own foolish policies on pegging it’s currency to the dollar. Because by doing that, China gets our (United States) inflation. The United States biggest export to China is inflation; they send us products and we send them paper. So we get more stuff, that’s what keeps prices low for the U.S. and China gets more paper, that’s what makes prices rise (inflation). Why you ask? Answer: because China is sending their stuff away and paper is coming in; and the way it all works is the U.S. sends those dollars and then the Chinese Banks buy up those dollars and in turn prints RMB. The Chinese Money Supply then rises, that new money goes through the economy biding up prices, meanwhile the dollars that the Chinese buy get loan back to Americans because they buy our Treasury Bonds and our Mortgage Back Securities which keeps this whole phony economy here in the United States moving!

   The consequences for China are rising prices which result in a higher inflation which is at 5% currently in China. To counter this China thought that raising interest rates would curb inflation by encouraging people to put money away in savings at the bank. The only money China is attracting with the raise hike is speculative money; because by raising rates they attract a lot of hot money into RMB’s and people will do a carry trade, in which they short U.S. dollars and buy RMB because they know that the RMB is not going to go down against the dollar; it’s only going to go up and if they can borrow in dollars and buy RMB’s then it becomes a risk less trade from the perspective of a lot of people. So this rate hike may actually backfire on the Chinese because of a lot of the hot money coming into China, results in them having to print more RMB to keep their currency from rising. Normally when you raise interest rates your currency rises but China doesn’t want it’s currency to rise. It’s raising rates because it doesn’t want to let it’s currency to rise, but if it does keep on raising rates then it makes its own currency more attractive. So then to prevent the currency from rising what do they (China) have to do? Answer: they have to buy more dollars; they’ve got to grow their money supply faster. What does that mean? Answer: that means more inflation; but why do we care in America that inflation in China is a big deal? Because this is the key to all of the coming problems we will face in 2011.

   There are two options China really has in this situation. 1.) They can allow inflation to get worse and run out of control and if that happens you’re talking about a billion people, you’re talking about a lot of money that’s going to be chasing commodities and gold and everything if they realize there is massive inflation in their country. 2.) Or the Chinese can get serious about attacking inflation, not just speak about it but actually attack it.

   There’s only one way to do it and it’s not price controls, it’s not through higher rates, it’s through a stronger RMB. They’re not going to stop inflation until they stop inflating and inflating means growing their money supply and they are growing their money supply because they don’t want their currency to go up. Well If you let your currency go up then prices will come down and that will stop the Chinese Inflation but when they stop the Chinese Inflation they ignite the American Inflation. Instead of exporting our (U.S.) inflation to China, our inflation will stay right here in America. We will have our (U.S.) paper money, we won’t have the Chinese products or other products and so we will be biding up prices. Prices will then be going up and Bonds will be falling, interest rates will be rising!

Uncle Bens Animal Farm

   In 2011 the United States will see the 30 Year Bond yield be above 5% in Q1 and by Q2 and Q3 the yield will be above 6% and we will have interest rates at a 10 year high. Now what is that going to do to the economy; what’s it going to do to the Mortgage Market? Remember why this will happen, Ben Bernake “Quantitative Easing” was all about bringing rates down. Instead of rates going down they are doing the opposite; they are going up. They are even going up despite the fact that the FED is buying Bonds in a effort to artificially push them down.

   Look at the charts of some of these commodities; look at the chart of the CRB, extremely bullish! There is no resistance in the CRB, maybe we might get some at the 365 level. That spike in the CRB will happen. We had a similar move in the CRB in 2008 before the collapse in the markets was up at 473 levels. We will be there again in 2011 and may even eclipse the 473 number. This means the FED will be forced to make the decision it has tried to avoid.

   Uncle Ben said on “60 minutes” that “the FED could raise interest rates in 15 minutes if it had to.” well we will see if Ben meant it cause he will have to raise interest rates. That will be the most difficult 15 minutes of his life when he has to raise them, which will end his world and ends his fantasy where we will have a collision course with reality. Because remember the way the government was able too delay the crisis in 2008 which was “print money” expand, stimulate; the FED was able to buy up debt, buy up Mortgages, buy up treasuries. That’s what has kept this whole phony economy going, is the FED’s ability to constantly inject money; to keep buying Bonds and to keep bailing everybody out. When the FED has to deal with Inflation as a problem, when the FED sees prices rising, long term interest rates rising and now is force to raise rates. The FED can’t bail out anybody because it would be adding to the problem; the FED can’t buy Bonds when it’s the one selling Bonds, it can’t buy Mortgages when it’s one of the sellers of Mortgages. So it’s not going to be just the private sector trying to unload and the govt. coming to the rescue. It’s going to be the private sector and the govt. through the FED trying to unload and nobody coming to the rescue. So this is the decision the FED chairman doesn’t want to have to face; raise interest rates or just keep inflating and say “I lied” inflation is here to stay. I think the latter will happen but the FED will try to spin it in some double speak. It will probably go something like this “The increase is welcomed, it shows we have a victory over deflation, a little inflation is good for us.” They will try hard to rationalize why it’s okay so that they don’t have to put on the breaks; “Don’t worry inflation isn’t going to get too bad.” It will not work and it will rage out of control very… very… quickly.

   All of this is going to happen and we will hear it from the puppet master himself on Friday the 7th of January when Uncle Ben gives his speech before the budget committee. This disaster will occur in 2011 and will probably happen in the next couple of months.

  Is it possible that this move up in Bond yields is all a fa├žade? Then the scenario is going to be pushed back and we will get some longer rope to hang ourselves later on. But their may be some real money and real power behind these recent moves in the Bond Market. It’s not just Bonds; look at some of the charts in commodities, Silver, Gold, Crude Oil, Soy Beans, these markets look like they are going a lot higher. I think it’s more than just a coincidence this is all happening and happening at a time when the Chinese are finally having to face the music when it comes to the inflation that resulted from their foolish currency peg.