President Obama’s Budget for FY 2010 – A Continuation of the Bush Era

February 28, 2009 · Posted in Government · Comment

President Obama’s Budget for fiscal year 2010 (for some reason titled “A New Era of Responsibility”) in a nutshell:

Department of Defense and international expenses (spending on wars and occupations) will go up from $666 billion to $673 billion (under President Bush it grew from $316 billion to$666 billion)
Other appropriated programs will go up from $613 billion to $695 billion (under President Bush it grew from $298 billion to$613 billion)
Social Security expenses will go up from $662 billion to $695 billion (under President Bush it grew from $406 billion to$662 billion)
Medicare expenses will go up from $425 billion to $453 billion (under President Bush it grew from $216 billion to$425 billion)
Medicaid expenses will go up from $259 billion to $290 billion (under President Bush it grew from $117.9 billion to$259 billion)
Other mandatory program expenses will drop from $673 billion to $571 billion (under President Bush it grew from $290 billion to$673 billion)
Net interest will go up from $139 billion to $164 billion (under President Bush it dropped from $222.9 billion to$139 billion)
Disaster cost will go up from $4billion to $11 billion (under President Bush it went from $0 billion to$4 billion)

The total of proposed federal government expenses for FY 2010 is $3.552 trillion. President Obama is planning to spend more on virtually every government program, except for other mandatory programs.

During and after his campaign President Obama talked a lot about “tough choices” we will all have to make. I would like him to tell us where in this budget he made a single tough choice. He promised to go through the budget line by line and eliminate wasteful programs. Where did he do that in this budget? He is even proposing to spend more on wars and the military. A budget that President Bush inflated by more than 100% from $316 billion to$666 billion! I would like President Obama to answer one simple question: Why?

The president’s budget estimates tax receipts of $2.2 trillion, $2.4 trillion, $2.7 trillion, and $3 trillion for 2009, 2010, 2011, and 2012, respectively. These estimates are laughable. My projections for tax receipts, as I explained in The Coming US Tax Receipt Shortfall:

Federal tax receipts will fall to $2.25 trillion in 2009, to $2 trillion in 2010, to $1.75 trillion in 2011, and to $1.5 trillion in 2012.

Meanwhile there is no indication that government expenses will fall. Even with the current, now completely obsolete, budget estimates for government expenses, the Federal deficit would develop as follows:

$850 billion for 2009

$1 trillion for 2010

$1.3 trillion for 2011

$1.7 trillion for 2012

These are very optimistic figures. It wouldn’t be surprising if actual figures turned out to be around double or triple those numbers, unless a true change in policy were to occur.

Now that we have updated figures on coming expenses it’s time to update the deficit predictions:

$1.65 trillion for 2009
$1.6 trillion for 2010
$1.95 trillion for 2011
$2.2 trillion for 2012

If President Obama keeps spending like this, and really wants to cut the deficit in half by 2013, he will at one point be faced with no other choice but to raise taxes on all Americans, rich, middle class, and poor. This is of course nothing new. Taxes have been rising in the US for the past century.

It is certainly disappointing that Obama has now undoubtedly expressed his intention of continuing the irresponsible policies of the Bush era. But it is not really surprising. Obama has already promised us more of the same during his campaign and before taking office.

Tags: 2010, us budget

2008 – A Complete Disaster for Boeing

February 27, 2009 · Posted in Business · 3 Comments

Boeings 2008 Q4 results confirm the expectation that the financial situation for the company would deteriorate quickly.
As I wrote about 3 months ago:

Boeing’s numbers show us the following:

- From 2005-2007 the company’s free cash flow (operating cash flow – capital expenditures) grew from $5.5 billion to $7.9 billion

- This year, so far, the company has generated a free cash flow of $389 million with the two past quarters yielding negative cash flows; unless the 4th quarter yields incredibly good results the overall free cash flow number for this year will look very bleak

- A look at the most recent balance sheet shows us that the company is among the highly leveraged ones with a 6:1 debt to equity ratio

- What stands out in particular that the company maintains an accounts payable balance of $27 billion versus a shareholders equity of $8.7 billion and a cash balance of $4 billion: the company is obviously making its vendors wait, the article above mentions that a lot of work is being outsourced

- Thus Boeing heavily depends on a lot of vendors that are (1) not being paid in a timely fashion and (2) will most likely not get paid anytime soon if the current economic trend hold up and the company keeps delaying deliveries and losing cash.

I am very bearish on Boeing and expect some seriously bad news for investors shortly. Surely Boeing will also be deemed “too big to fail” by US lawmakers. Obviously, the next step will be yet another bailout request.

The annual report now shows us:

- The free cash flow for 2008 as a whole was $ -2 billion, that is down from regular numbers between $5.5 billion and $ 7.9 billion from 2005 through 2007

- The balance sheet shows us that Boeing shareholder’s equity from Q3 to Q4 08 has dropped from $8.7 billion to $ -1.294 billion. Boeing, like GM and Ford is now officially worth less than $0.00 on its books.

Please also consider Boeing Scrambles for Contracts:

(…) With the government deficit already stretched beyond sanity, how should any more money be left for new fighter jets and planes, especially under an Obama administration?

Boeing is a stock that is poised to collapse.

Since the report came out Boeing has resumed its decline in a straight line and dropped from $42 to now $33.

Please also consider the following grim news for Boeing:

US Senate bill aims to fix Pentagon arms buying:

(…)
The bill builds on past legislative efforts by Levin, McCain and other lawmakers to reform the acquisition process, but it comes at a time when the financial crisis is putting additional pressure on the Pentagon’s budget.

“The financial crisis has proven to be a really interesting forcing function,” said one congressional aide, who asked not to be named. “There just isn’t as much money to go around.”

Fundamental changes were needed to get a grip on systemic problems plaguing Pentagon procurement, said the aide, adding, “Otherwise you’re just rearranging the chairs on the Titanic.”

President Barack Obama and Defense Secretary Robert Gates say they plan to scrutinize major weapons programs, especially those that have run into cost and schedule problems.
(…)

Obama seeks to cut cost of big weapon systems:

(…) Also in Pentagon’s sights could be Lockheed Martin’s F-22 Raptor fighter jet and Boeing Co.’s Super Hornet, which some lawmakers have argued aren’t the right equipment for fighting terrorist groups. Further, missile defense has long been in doubt among Democrats, and cuts there would impact Raytheon Co. (…)

Pentagon Faces Tough Budget Choices:

(…) Mr. Gates’s vision for a leaner budget is bumping up against the military’s own assessment of its weapons needs. Air Force Chief of Staff Gen. Norton Schwartz said Tuesday the service will ask for more Lockheed F-22 Raptor fighters, though Mr. Gates has said the planned 183 jets are sufficient. But Gen. Schwartz also cut back the Air Force’s previous goal of buying 381 of the $143 million jets.

For Boeing Co., a more than $200 billion Army modernization effort, shared with SAIC Inc., is expected to come under pressure, despite success in speeding up deployment of some systems.

Boeing Gets the Boot:

On Tuesday, the news came down: Boeing’s challenge of a Pentagon award to build America’s Next Top Humvee has been definitively rejected. The Government Accountability Office denied the protests from Boeing and partner Textron (NYSE: TXT), which had challenged the Pentagon’s decision to award a trio of $60 million Joint Light Tactical Vehicle (JLTV) prototype contracts to:

General Dynamics (NYSE: GD) and partner AM General.

Navistar (NYSE: NAV) and BAE Systems.

Lockheed Martin (NYSE: LMT) along with BAE Systems (again).

Likewise, a joint protest from Northrop Grumman and partner Oshkosh (NYSE: OSK) got the big poke in the eye from on-high. Along with losing bidder Force Protection (Nasdaq: FRPT), it looks like they’ll be warming the bench for the next few decades as one or more of the Pentagon’s favorites rakes in the tens of billions of revenue dollars that stand to be poured into the JLTV program.

Anyone see any reason why this year and the following should be any better than 2008? I don’t. I still expect Boeing’s stock to come crashing down hard.

Tags: boeing

The Self Hatred of the Masses

February 26, 2009 · Posted in Philosophy · 5 Comments

The average person does not in any way have an impact on major developments in the world. Be accomplishments in politics, science, business, architecture, literature, the common man does not contribute in any major way. He listens to what he is told in the media and by his favorite politicians. He doesn’t question, reason or think. He follows and takes orders, he doesn’t lead, change or create. He thinks and stays inside the box.

Only very few people have the drive and the ability to create, change, and improve things. The greatest technological accomplishments in this world, such as electricity, motor vehicles, aviation, or computers were not made by a collective herd of compliant individuals. They were the work of a few innovative, industrious, and contrarian researchers and businessmen.

Today the American worker enjoys goods and services that a Croesus or the Medici would have envied him for. But he doesn’t realize that it was very few brilliant people before him who made this possible. He mostly takes these things for granted. He doesn’t acknowledge his deficiency when compared to these individuals, in fact he generally scorns them as intellectual elitists.

Those few who create, change, and innovate are caught in a precarious predicament. They need to produce for a large number of people who generally display poor judgment, bad taste, and consume goods of little intellectual value. This is particularly true in the fields of entertainment and literature. The majority of people prefers shallow movies and novels. But in a relatively free system the producers have no choice. They have to serve their consumers as they please and subordinate their will to the wishes of the masses.

Nobody likes to accept the fact that he himself is a tiny cog in a huge machine and that he has contributed nothing to the accomplishments of his age. Thus he finds refuge in the words of the politicians. The people who tell him that all humans are equal. That no one person contributes more than another. Thus he falls for the soothsayers of collectivism. He begins to sympathize with the mindless blather of the worshipers of nature, the people who tell him that human accomplishments will always be inferior to the creations of the seas, the earth, and the winds, that the merely man-made New York skyline is dwarfed by the colossal beauty of the Alps, the Sierra Nevada mountains, or the redwood trees of the Yosemite valley. He finds comfort in the words of religions that tell him that in the end we’ll all be judged by god in heaven and that mundane accomplishments won’t matter anyway.

Thus he begins placing his trust in government instead of in his own capacities. The government, as the mystical force that can conjure up wealth out of nothing. The government that tells him everything he wants to hear. The government that represents the mighty collective versus the callous and rugged individual. The government that will fix all his problems. The thought of that is way too appealing to be cast aside as a result of any logical reasoning. Plus an army of self styled intellectuals stands ready with simple and shallow justifications for any government policy, no matter how mindless and harmful it will be.

Thus he begins placing his trust in the god almighty instead of human logic and reason. God, the ultimate judge of all his inferior children. God who will welcome him in his benign aegis as one among equals once his sorry mundane life is over. Again an army of self styled intellectuals stands ready with simple and shallow justifications for any particular religion one happens to have fallen prey to.

Justification for one’s relevance unwittingly turns into a genuine hatred of mankind in general, and ultimately self hatred.

Ayn Rand put it best in The Fountainhead. When the opportunistic, yet brilliant publisher Gail Wynand tells his soon to be wife Dominique on their romantic excursion on his yacht:

“[T]he person who loves everybody and feels at home everywhere is the true hater of mankind. He expects nothing of men, so no form of depravity can outrage him.”
“You mean the person who says that there’s some good in the worst of us?”
“I mean the person who has the filthy insolence to claim that he loves equally the man who made that statue of you and the man who makes a Mickey Mouse balloon to sell on street corners. I mean the person who loves the men who prefer the Mickey Mouse to your statue-and there are many of that kind. I mean the person who loves Joan of Arc and the salesgirls in dress shops on Broadway-with equal fervor. I mean the person who loves your beauty and the women he sees in a subway-the kind that can’t cross their knees and show flesh hanging publicly over their garters-with the same sense of exaltation. I mean the person who loves the clean, steady, unfrightened eyes of man looking through a telescope and the white stare of an imbecile-equally.”

(…)

“You’ve never felt how small you were when looking at the ocean.”

“Never. Nor looking at the planets. Nor at mountain peaks. Nor at the Grand Canyon. Why should I? When I look at the ocean, I feel the greatness of man. I think of man’s magnificent capacity that created this ship to conquer all that senseless space. When I look at mountain peaks, I think of tunnels and dynamite. When I look at the planets, I think of airplanes.”

(…)

“It’s interesting to speculate on the reasons that make men so anxious to debase themselves. As in that idea of feeling small before nature. It’s not a bromide, it’s practically an institution. Have you noticed how self-righteous a man sounds when he tells you about it? Look, he seems to say, I’m so glad to be a pygmy, that’s how virtuous I am. Have you heard with what delight people quote some great celebrity who’s proclaimed that he’s not so great when he looks at Niagara Falls? It’s as if they were smacking their lips in sheer glee that their best is dust before the brute force of an earthquake. As if they were sprawling on all fours, rubbing their foreheads in the mud to the majesty of a hurricane. But that’s not the spirit that leashed fire, steam, electricity, that crossed oceans in sailing sloops, that built airplanes and dams . . . and skyscrapers. What is it they fear? What is it they hate so much, those who love to crawl? And why?”

It is ultimately their own deficiency they hate. It is what makes them follow false ideas. But ultimately there is no problem with deficiency per se, so long as one accepts it and makes an effort to improve. The problems only arise when people reject reality, refuse to improve, and begin to delude themselves.

Tags: ayn rand, collectivism, Government, individualism, religion, the fountainhead

Unbelievable Export Contraction in Japan

February 25, 2009 · Posted in Global Economics · Comment

Bloomberg writes Japan Exports Plummet 45.7%, Deficit Widens to Record:

Japan’s exports plunged 45.7 percent in January from a year earlier, resulting in a record trade deficit, as recessions in the U.S. and Europe smothered demand for the country’s cars and electronics.

The shortfall widened to 952.6 billion yen ($9.9 billion), the biggest since 1980, the earliest year for which there is comparable data, the Finance Ministry said today in Tokyo. The drop in shipments abroad eclipsed a record 35 percent decline set the previous month.

Exports to the U.S. tumbled an unprecedented 52.9 percent from a year earlier, and shipments to Asia and Europe also posted the largest-ever declines as the global recession deepened. The collapse is likely to force Japanese companies to keep firing workers and closing factories, worsening an economy that shrank the most in 34 years last quarter.

“The pressure on companies to cut jobs and investment is rising and that will make the recession deep and protracted,” said Yasuhide Yajima, a senior economist at NLI Research Institute in Tokyo.

Shipments to Europe slid 47.4 percent in January from a year earlier, the Finance Ministry said. Exports to China fell 45.1 percent and those to Asia dropped 46.7 percent.

Imports fell 31.7 percent from a year earlier. The drop in exports was in line with economists’ estimates. Analysts predicted a 1.2 trillion yen trade deficit.

Yen Relief

The yen fell to 96.91 per dollar as of 12:28 p.m. in Tokyo from 96.72 before the report. The currency is at the lowest level against the dollar in three months as the weakening economy reduces its allure as a haven.

The yen’s 23 percent gain against the dollar in 2008 eroded the value of exporters’ overseas sales, exacerbating losses at companies including Nissan Motor Corp. and Toyota Motor Corp. The exchange rate has also made Japanese exporters less competitive than their rivals in South Korea, where the won’s 16 percent drop this year has helped to shield earnings of companies including Hyundai Motor Co.

Still, the Japanese currency has weakened 7.2 percent this month, offering some relief to exporters while indicating investors’ growing pessimism about the economic outlook.

“People are coming to realize that Japan is in deep trouble,” said Hiroshi Shiraishi, an economist at BNP Paribas Securities Japan Ltd. in Tokyo. “Considering what’s happening on the export side, and the implications that has for the domestic economy, the yen is clearly not a buy.”

Falling Stocks

Japanese stocks touched a 26-year low yesterday and the government is considering buying shares to support equity prices, the Nikkei newspaper reported today, without saying where it got the information. The Nikkei 225 Stock Average has lost 17 percent of its value this year. It rose 1.6 percent in morning trading.

The world’s second-largest economy shrank at an annual 12.7 percent pace last quarter, the most since the 1974 oil shock, and analysts predict the slump will drag into next fiscal year. Japan may shrink a record 4 percent in the year starting April 1, according to economists surveyed. The worst contraction to date was fiscal 1998’s 1.5 percent drop.

Japan became more reliant on exports for growth in the past decade, making the economy more vulnerable to the global recession. Manufacturers shipped 21 percent of their goods abroad in 2008, up from 16 percent in 1998, according to the Bank of Japan.

Production Cuts

Companies cut production an unprecedented 9.8 percent in December from a month earlier and the jobless rate climbed the most in 41 years to 4.4 percent. Economists predict a report on Feb. 27 will show factory output dropped 10 percent in January.

Nissan said this month it will fire 20,000 workers and post its first loss in nine years as the global car demand plunges. Toyota, which is forecasting its first operating loss in seven decades, will halve production in the current quarter versus the same period last year.

Central bank Governor Masaaki Shirakawa said last week that the economy will remain in a “severe” state next quarter and companies will struggle to obtain financing as investors shun risk. The bank, which lowered the key overnight lending rate to 0.1 percent in December, last week said it will buy corporate bonds for the first time to stem the credit squeeze.

The government has been unable to pass a stimulus package that could help encourage domestic spending in the absence of export demand. Prime Minister Taro Aso is struggling to get approval from the opposition-controlled upper house to spend 10 trillion yen to aid companies and households, whose sentiment is near a record low.

The Japanese government is actually buying stocks on the stock market outright in order to keep stocks expensive. This is nothing but sheer insanity. In addition the Japanese central bank is buying up corporate bonds. Japan has learned absolutely nothing from their own crisis.

All this, plus this incredible export contraction, is certainly a harbinger of a substantial and ongoing Dollar rally against the Yen.

A contraction of Japanese and Chinese exports to the US is of course direly needed to restore global balance. Ongoing large current account surpluses and deficits are simply unsustainable. The source of this problem is the credit expansion policy in the US as explained in The US Current Account Deficit. Everything I said in there about China applies to Japan minus the currency peg.

Tags: dollar, exports, japan, yen

Governor Bobby Jindal Responds to Obama’s Speech Before Congress

February 25, 2009 · Posted in Politics · Comment

Although there is a lot of shallow talk in Governor Bobby Jindal’s response to Obama’s speech today, he raises a few excellent points. In particular:

The fact that the majority in Congress is misguided in believing in continuing the extension of government power instead of placing it back in the hands of the people.
An example of how miserably the Federal government failed during Katrina, while local efforts were what helped rescue people during the hurricane aftermath and helped rebuild New Orleans.
The importance of cutting taxes for families and small businesses.
The necessity of reigning in government spending instead of expanding it.
A clear statement against government run health care. Doctors and patients, not Washington should make decisions.
Making sure that we never ever see the passage of an $800 billion spending bill that no member of Congress has read before voting for it.
The fact that Republicans have betrayed their traditional principles of personal responsibility and limited government (which is the reason why we are where we are now).

Unfortunately he has also fallen prey to the fallacy that we somehow need to “stabilize” home prices, instead of letting the consumers decide how much they want to pay for a home. Home prices need to and will come down by much more than they already have, simply because too many homes have been built during the housing boom. What could be better for the poor and little income earners than homes that are much cheaper than they are now? Nobody in government or Congress educates the people about this truth. I’m sorry, nobody except for Ron Paul of course …

Part 1/2:

Part 2/2:

Tags: bobby jindal

Home Prices at 5 Year Low

February 24, 2009 · Posted in General Economics · Comment

Click on image to enlarge.

The Case-Shiller Composite Home Price Index has dropped to 162.12 from 166.05 last month and 200.67 a year ago (-2.34% and -19% respectively). It is now below the level from January 2004.

Top 3 annual declines by cities:

1. Phoenix, AZ: 34%
2. Las Vegas, NV: 33%
3. San Francisco, CA: 31%

Top 3 monthly declines by cities:

1. Phoenix, AZ: 5.06%
2. Las Vegas, NV: 4.81%
3. Minneapolis, MN: 4.67%

Tags: case shiller, december 2008, home prices

Ron Paul: What If …

February 24, 2009 · Posted in Foreign Policy · Comment

Tags: afghanistan, iraq, ron paul, war

US Stake in Citi Won’t Fix a Darn Thing

February 24, 2009 · Posted in Business · Comment

Reuters writes New U.S. stake in Citigroup may not calm doubts:

Even if the government took a large common equity stake in Citigroup Inc, worries would likely persist about the bank’s ability to absorb soaring losses in a deepening recession.

The third-largest U.S. bank by assets is in talks with federal regulators on a plan for the government to increase its stake, a person familiar with the matter said. Converting $45 billion of preferred stock, which the government obtained last fall, to common stock is one of many options, the person said.

An agreement could be announced Monday or Tuesday, CNBC television said.

Citigroup shares rose on Monday after the White House repeated that President Barack Obama believes keeping banks in private hands is “the best way to go.

U.S. bank regulators, meanwhile, said they stood ready to provide more capital to the sector and keep “systemically important financial institutions” viable.

But investors remained worried that losses from credit cards, emerging markets, trading and toxic assets could overwhelm Citigroup Chief Executive Vikram Pandit’s efforts to restore the bank’s fiscal footing. Analysts do not expect the New York-based bank to be profitable in 2009 or 2010.

Converting preferred shares to common equity “helps their capital ratios but it doesn’t help their problem assets,” said Walter Todd, portfolio manager at Greenwood Capital Associates LLC in Greenwood, South Carolina. “If Citi were out of the woods, the stock would not be at $2.”

The government plans on Wednesday to subject banks with more than $100 billion of assets to “stress tests” to decide which need more capital. Citigroup ended 2008 with $1.95 trillion of assets.

Citigroup shares closed up 9.7 percent at $2.14. They earlier traded as high as $2.48, but gave up some gains as broader indexes fell.

One needs to wonder how many more times it needs to be pointed out until people realize that Citigroup is dead:

Citi’s Endgame

Citigroup Agony Prolonged

Game Over for Citi

Now regulators are discussing a conversion of $45 billion from preferred stock into common stock. How is this supposed to solve any structural problems? All that is behind this move is that Citi doesn’t want to pay the preferred dividend to the taxpayer anymore. Kiss the idea goodbye that taxpayer money invested will be recovered in any way. Citi’s common stock market cap is at around $10 billion now. A $45 billion conversion of preferred into common stock will all but wipe out common shareholders. Citi’s shares will follow Fannie Mae and Freddie Mac’s leads and turn into penny stocks.

In reality the company’s common stock isn’t even worth $0.00. I have explained this so many times and it can be read up on in the links I posted above. So I won’t get into it again.

How does any of this clean up Citi’s balance sheets?
How does any of this help investors trust that assets are marked to fair market value?
How is any of this supposed to restore trust in the US banking system?
How are we supposed to get credit flowing again if the banks’ balance sheets are full of garbage and people don’t trust banks with their savings?
How have any of these policies helped avert the continuous decline of the US economy?
How does the taxpayer get anything out of this?

To hell with Citi. Let them go bankrupt and be done with ongoing postponements of the inevitable.

The source of the crisis is that in response to the most irresponsible monetary and fiscal policy, US consumers and government borrowed too much, spent too much, and saved too little, setting in motion The Business Cycle via Credit Expansion and creating an environment of capital consumption. Nothing of what the government is currently doing even remotely addresses these issues. To the contrary, it continues and aggravates the irresponsible habits of the past. Big government is getting bigger by the day. Just as it has been for the past decades, with no change in sight under the Obama administration.

Tags: Citigroup, corporate bailouts, government bailouts

Mr. Bernanke, with all due respect: Shut the hell up.

February 24, 2009 · Posted in Monetary Economics · 1 Comment

This is an excerpt of Bernanke’s most recent statement from February 18th 2009:

In the United States, the Federal Reserve has done, and will continue to do, everything possible within the limits of its authority to assist in restoring our nation to financial stability and economic prosperity as quickly as possible.

Since October 2007 the public and the politicians have realized that the US economy is in a tailspin. The effects of the long term recession that had already been visible for much longer to those who had been following True GDP had finally reached even the most clueless people amongst us.

Since then the Dow Jones has dropped by about 50%. GDP has been declining constantly. Unemployment has risen constantly.

Below please find a list of part of the countless pledges and shallow platitutes that FED Chairman Ben Bernanke has uttered during this economic decline.

December 1st 2007:

Bernanke, addressing business leaders in Austin, Texas, said the Fed will continue to use the tools it has been given to fight the financial crisis. (…) “Although conventional interest rate policy is constrained … the second arrow in the Federal Reserve’s quiver — the provision of liquidity — remains effective,” he said.

February 6th 2008:

Federal Reserve chief Ben Bernanke reaffirmed his willingness to use all tools available to aid the economy, according to Sen. Chris Dodd, chairman of the Senate Banking Committee.

August 21st 2008:

A US senator said Tuesday that Federal Reserve chairman Ben Bernanke pledged to use “all tools available” to avert a worsening of the housing and credit problems roiling financial markets.

October 7th 2008:

Fed’s Bernanke: All tools will be utilized to help stability, will consider whether current monetary policy is appropriate

- Remarks that commodity prices show extraordinary volatility, inflation outlook has improved somewhat.
- Notes that market turmoil and weak data will exhibit US growth outlook worsening, and downside risks are increasing.
- Fed will begin using reserve interest powers this week.

October 15th 2008:

Federal Reserve Board Chairman Ben Bernanke said today that passage of the Wall Street bailout bill earlier this month gave the government a full set of tools it can use to tackle the credit crisis, although he added that more traditional tools, like lowering interest rates, may well be used again as the crisis unfolds.

‘The problems now evident in the markets and in the economy are large and complex, but, in my judgment, our government now has the tools it needs to confront and solve them,’ Bernanke said in a speech to the Economic Club of New York today.

December 16th 2008:

The Fed added it will employ all available tools to stoke growth and preserve “price stability.”

January 14th 2009:

“The Federal Reserve retains powerful policy tools and will use them aggressively to help achieve this objective,” Bernanke said. “Fiscal policy can stimulate economic activity, but a sustained recovery will also require a comprehensive plan to stabilize the financial system and restore normal flows of credit.”

January 28th 2009:

…the Fed said it is now ‘prepared’ to buy longer-term Treasury securities if the circumstances warrant such action.

February 10th 2009:

Bernanke continued to emphasize that the central bank has additional tools available at its disposal now that its key lending rate is now at its “effective floor.”

Now let’s see what Ben Bernanke is up to this week:

Federal Reserve Chairman Ben Bernanke this week will offer assurance that help is on the way for the troubled U.S. economy and may offer clues on additional steps that could be taken to halt an ever-steepening dive.

With U.S. stocks closing at 6-1/2-year lows on Friday on fears big banks will be nationalized, Bernanke will likely be pressed on government plans to clean up the financial sector when he delivers the Fed’s semiannual monetary policy report to Congress in two days of testimony on Tuesday and Wednesday.

In addition, the Fed chief will face the challenge of making the case that the U.S. central bank, which has chopped interest rates to near zero and flooded markets with hundreds of billions of dollars, still has the ammunition to pull the economy out of its worst downturn since the early 1980s.

“He’s going to talk about the Fed still having tools in its tool kit and that it will do whatever it can to get the economy going,” said Joseph LaVorgna, an economist for Deutsche Bank Securities in New York.

…ah yes, awesome. Haven’t heard that one before. Anyone still listening to this guy?

Mr. Bernanke, we have had enough of your clueless nonsense. You have no idea what you are talking about. Spare us more tools, “innovative” ideas, platitudes, and mindless blather. Pack your toolbox, go home and read up on The Great Depression, Credit Expansion, and The Business Cycle. Until you are done, please do us all a huge favor: Shut the hell up.

Tags: ben bernanke

Silver More Desirable than Gold

February 23, 2009 · Posted in General Economics · Comment

The Fool writes:

From the beginning of my contributions here at The Fool, I have expressed my conviction that silver offers far more upside potential than even gold for Fools seeking precious metals exposure. By no means do I advocate targeting exclusively silver in place of gold, but I maintain that silver makes the perfect complement to gold exposure, and ought not be overlooked.

See this 2-year chart comparing the relative performance of gold vs. silver, expressed via the proxy ETFs for convenience:

Now, at the worst levels of this precious metals correction (which is now over in every major world currency except the USD), the gold:silver ratio surpassed the 80 mark, which signalled to me that the time was right to be heavily weighted in silver. I created the ‘silverminer‘ CAPS profile on 11/19/08, and the result has been fairly positive so far, but I mention this only to highlight the trend in play. You see, even at today’s ratio of 70 following silver’s recovery from $9 to over $13, I believe silver still has plenty of room to run to normalize this at least towards the 50 level for starters. Later in this precious metals bull market, I expect the ratio to approach 20:1. That would mean silver at $45 today at present gold prices, but I believe that ratio will be reached when gld is sugnificantly higher than where we are today.

If silver reaches the 20:1 ratio near my extremely conservative gold price target of $1,650, that would give us $82 silver. With long-term expectations like these, now you see why I remain so heavily allocated in precious metals.

Coming back to the near-term, though, I avoid speaking to the very near-term because absolutely anything is possible within a short timeframe when entire markets are manipulated to the degree that these markets are. That being said, the manipulation efforts must ultimately fail, and I expect gold to move very bullishly past last year’s high and up toward $1,250 in a way that will surprise even many gold bulls. We could see some weakness before that occurs as last-ditch efforts to contain the price are executed, but I believe such an effect can not last long. At $1,250 gold, a 37% rise from today’s price, I expect silver to trade well into the mid $20s, for a gain of more than 90%. This would of course correspond to a simultaneous drop in the gold:silver ratio to around 50:1.

See this long-term chart of historical gold:silver ratios charted alongside the silver price chartfor a reference. A target ratio of near 20:1 is my rationale for having heavy exposure to silver for the long haul, but I believe even Fools with a shorter time horizon can consider riding the mid-term trend from the current 70:1 ratio to about 50:1. I see a big year ahead for silver once gold breaks out in USD terms the way it has already in the other currencies.

I have said elsewhere that most ratios mean little in this chaotic environment, but the gold:silver ration will always be an important one for precious metal investors to follow, because ultimately these metals are called precious for a reason. Within the Earth’s composition, it is estimated that gold and silver exist in a ratio of 16:1. Food for thought, if indeed markets always seek out true value over time.

Fool on!

I fully concur. I said back in December that Silver had bottomed for pretty much the same reasons:

This year the price of a silver ounce has fallen to less than 1/82 of a gold ounce. While gold pulled back by about 30% from $1,011 to around $704, siver has plummeted by 58% from $20.92 to $8.79.

With the money supply on the rise again, and the Federal Reserve policy obviously out of control, coupled with a very cheap ratio in terms of gold, it is certainly reasonable to start being bullish on silver again. Silver is, after gold, the best monetary metal. True, it derives a lot of its demand from industrial uses, but it has already taken its beating for it.

As far as my limited chart reading skills go, the SLV chart seems to reaffirm this belief:

Click on image to enlarge.

Has a floor formed? I do think so. Has the trendline been broken? Not quite yet, but it looks like we’re close to a trend reversal.

Silver investments have paid off handsomely since then. The ETF SLV went up by over 40% to now $14.30 and the silver stock Silver Wheaton (SLW) has more than doubled. During the same time the Dow Jones has dropped by about 22%.

Tags: silver, silver wheaton