Category: General

The Beginning of the End of Paper Money

Posted on by The INO.com Team

As someone who I frequently read and visit, I've asked John Rubino from DollarCollapse.com to come and give us his insight on the current state of the economy...and a BOLD prediction for 2015. Read on and comment on the prediction!

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Today the Fed announced another rate cut, which is both a foregone conclusion and a big yawn. Short term interest rates are already at zero or thereabouts, so that policy tool is pretty much a spent force. The real excitement came when Ben Bernanke explained that short term interest rates are just one of the levers he can pull, and nowhere near the most powerful one. Going forward, the Fed will engage in what is known as “quantitative easing,” an obscure term for something both simple and terrifying: The Fed will create dollars--maybe trillions of them--and buy up other assets.

At first it will buy mostly longer-dated Treasuries, in order to push down rates at the distant end of the yield curve. But because long-term Treasury rates are already at record lows, that strategy has a limited value. Pushing the 30-year yield from today’s 2.93% to, say, 2% won’t have a noticeable impact on the world’s frozen credit markets. Because the problems are with corporate bonds and asset backed securities, the Fed will have to buy increasing amounts of them.

This will have the desired effect of reliquefying the banking system--for a while. But the global financial markets aren’t stupid (okay, they are. But they do learn eventually, after being smacked in the face with enough monetary two-by-fours). This flood of dollars will send the value of the dollar down versus other currencies, and push up interest rates on the very long-term bonds that the Fed is buying with newly printed currency.

The result? The mother of all currency crises, in which a falling dollar causes other countries to devalue their own currencies in order to keep their export industries from imploding, which causes everyone to avoid bonds (which pay interest in depreciating currencies), which causes long-term rates to rise world-wide, which causes central banks to print even more currency in a futile attempt to repeal the law of supply and demand.

It’s going to get very, very ugly, and--after a series of failed experiments with capital-and-price controls--will lead to the realization that the whole concept of fiat (i.e. government controlled) currency is fatally-flawed. Along the way, older forms of money like gold and silver, which can’t be created in infinite quantities by panicked governments, will soar in value. I’ll go out on a limb and predict $5,000 gold and $100 silver by 2015.

John Rubino

DollarCollapse.com

The Ship - RMS Treasuries

Posted on by The INO.com Team

Today's guest blogger is Tony D'Altorio, an analyst for Oxbury Research. Tony's credentials include over 20 years as a stock broker and trading supervisor. Today, Tony tells a tale about the shifting market seas and how we look to captians to guide us through turbulent financial waters.

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I am not sure where this old saying originated - “a calm sea does not a skilled sailor make.” This old saying is absolutely relevant in the investment world of today. The average individual investor turns to Wall Street investment “professionals” to guide them through these difficult economic times.

Yet most of these so-called professionals are clueless. Why? Because all they have ever experienced in their careers are bull markets in stocks and bonds – in other words, calm seas. They entered the investment business in the 80s or 90s and have seen only good times with very brief interruptions such as the 1987 swoon.

I still recall as if it were yesterday arguing with my colleagues at Schwab in the late 1990s. I kept saying that tech stocks were in a bubble and that, sooner or later, a bear market would ensue. I was always laughed at and ridiculed for my opinions. “C'mon, you'll never see a bear market again. Bear markets don't happen any more in modern-day America! After all, America is the leader in technology, the greatest military power, etc.”

I understood their perspective – they were 20 or 30 somethings who had joined the firm in the 90s and had only experienced markets which went up. They would advise clients with gems such as to buy and hold S&P 500 index funds for the long haul. I never did give such “sage” advice, which did not sit very well with my bosses. It was one of the main reasons I left the firm – I just could not tell clients in good faith such drivel.

A good example of a well-known clueless investment professional is Bill Miller of Legg Mason, of whom I've written about before. He became a Wall Street “genius” in the 1990s as his fund went up in sync with the tech bubble. His fund has been a disaster in the last few years as he bet heavily on financial stocks.

This past week Mr. Miller stated that the “bottom has been made” in US equities. That statement immediately told me we have further to go on the downside! Mr. Miller also called for - of course - the Federal Reserve to purchase stocks and junk bonds directly. Mr. Miller has that typical Wall Street combination of ignorance and a sense of entitlement.

Bond Market Bozos

However, even Mr. Miller's stupidity pales in comparison to the bozos in the Treasury market who are fighting each other in Wall Street's version of Thunderdome to “invest” their clients' money at rates of zero or one or two per cent. These people remind me of children gathered around a warm campfire on a cold evening roasting marshmallows who frighten each other with ghost stories.

Although instead of ghosts, it's deflation. Boo – deflation! “I think I see deflation”! There are panicked screams! “Oooh – I'm so scared”! “ I'd better go out and put every penny I “manage” for other people into T-bills at zero per cent”!

These frightened fools have priced in corporate default rates of 21% (the rate during the Great Depression was 15%) and deflation in the US for the next 5 to 10 years. As I've stated in previous articles, deflation is merely a bond market 'ghost story' meant to frighten people and separate them from their money.

At most, deflation would last in the US for no more than a few months. My view would change only if I saw actual 1930s type of economic statistics such as 25% unemployment or the US nominal GDP dropping by 50%.

Why do I think deflation is not a long-term threat? It's simple economics – a huge debtor nation such as the US cannot sustain deflation. In order to survive, the US needs inflation so that the country can pay back its debt with much “cheaper” dollars.

That process has already begun. Why do you think that the Federal Reserve is expanding our monetary base by more than $11 billion a day since September? And that does not include the latest trillion dollars that is being injected by the Fed into the financial system.

RMS Treasuries

The clueless sailors, or should I say pirates, of Wall Street have decided to put all of their remaining booty onto the ship called RMS Treasuries. Like it famous predecessor, the RMS Titanic, the RMS Treasuries is considered to be ultra-safe and “unsinkable.” I believe that much like its predecessor, the RMS Titanic, the RMS Treasuries will hit an iceberg and sink ignominiously into history.

The iceberg that the RMS Treasuries will hit will be inflation. Inflation will result from the massive printing of Monopoly money by the Federal Reserve in order to fund the US Treasury's seemingly insatiable need for tens of trillions of dollars to bail out Wall Street.

A side bar - sadly, America seems to be going down the road to where Wall Street is taken care of, it seems, but nobody else. A half-century ago, President Eisenhower warned Americans about an overly powerful “military-industrial complex”. I wonder what Ike would think about the “financial-political complex” that seems to be running the country now? And running it poorly, I might add!

Massive printing of money has, throughout history, always led to inflation. Despite what Wall Street says, this time will be no different. Always remember that the most dangerous words in the investment world are that “this time it's different”.

The clueless Wall Street sailors have basically turned the US Treasury market into a market with “return-free risk”. Investors should not ignore the flashing warning light – credit default swaps which insure against a default by the US rose to an all-time high this past week.

WANTED – A Few Good Sailors

It saddens me to see that the money entrusted to Wall Street “professionals” by average Americans is being lost. Somewhere along the route to prosperity for everyone, the Wall Street pirates hijacked the ship containing investors' capital. These Wall Street pirates had a huge drunken party with other peoples' money.

Much of that money has already been lost. What I fear is that the remaining money will go down with the RMS Treasuries and also disappear forever. It will be a devastating blow to our country to see an entire generation of Americans' hard-earned savings go down the toilet, just to finance the party that Wall Street had.

What can an individual investor do? The best advice I can give is to keep an open mind, look for opportunities, switch off CNBC, and get opinions and advice from sources which are completely independent from Wall Street.

I still have many friends in the investment industry working for brokerage firms, financial planners, and financial advisory firms and the advice they give has changed little. It's still the same drivel they were spewing in the 1990s. They are expecting “calm seas” to return any day now.

I would rate their skills as “sailors” right up there with Bob Denver's famous character – Gilligan. My kingdom for good sailors to help average investors navigate the current treacherous economic seas!

Smooth Sailing,

Tony D’Altorio

Analyst, Oxbury Research

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Originally formed as an underground investment club, Oxbury Publishing is an investment think tank second to none. The research team is comprised of a wide variety of investment professionals from equity analysts to futures floor traders all independent thinkers and all capital market veterans.

Triple Witching and Option Trading

Posted on by The INO.com Team

Today's guest blogger is Dan Passarelli the founder of Market Taker Mentoring and the author of the book Trading Option Greeks.

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Like the ’60s icon Donovan once declared, “Must be the season of the witch.” In option trading, the season of the witch comes four times a year, and it is almost upon us. The term “triple witching” was originally used to describe the day that index options, equity options and index futures all commenced trading in their expiring contracts. Though some of the major index options now stop trading on the Thursday before expiration, the third Friday of the month ending each quarter is still a day of note for option traders.

The “witchiness” of this day stems from the fact that option volume and the volume of the underlying stocks tend to be higher on that day, which sometimes leads to unexpected, magnified price swings. This could mean more risk.

But this witch needn’t necessarily be feared, shunned or burned at the stake. While this anomaly makes many traders and investors a bit nervous, a solid understanding of the phenomenon can make you a better, more successful trader.

A lot of traders, especially professionals who have been in the game a long time, like to go into expiration “flat the strike.” That means they generally like to close out the at- and near-the-money options about to go off the board. If a trader is long near-the-money options, he’ll sell them to get to zero contracts. If a trader is short near-the-moneys, he’ll buy them. Getting rid of expiring long options avoids the higher risk of accelerated theta that comes with expiration. Closing out short options avoids pin risk, or the risk of not knowing whether or how many options will be assigned.

All this option trading can be accompanied by greater volume in the underlying stock as professional (i.e., delta neutral) traders also close out their hedges by buying or selling stock. Depending on which way the liquidity providers were positioned in the options (long or short, calls or puts), this spike in stock volume may cause upward or downward pressure.

Understanding triple witching and being prepared for its implications should be part of traders’ strategy going into the quarterly expiration. Simply appreciating the fact that the underlying security can have these moves and knowing why gives traders the opportunity to adjust their trading plan for that day to factor in a potential “surprise” move.

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Passarelli started his trading career on the floor of the Chicago Board Options Exchange (CBOE) as an equity options market maker. He also traded agricultural options and futures on the floor of the Chicago Board of Trade (CBOT). In 2005, Passarelli joined CBOE Options Institute and began teaching both basic and advanced trading concepts. Be sure to visit Dan's Blog Trading Option Greeks and site Market Taker Mentoring

How the Panic of 2008 is creating more wealth than ever in the Forex markets.

Posted on by The INO.com Team

With Forex getting millions of hits on our site over the past few days I asked Bill Poulos from ProfitsRun to give us his opinion on the Forex markets. Bill has recently released a number of highly educational Forex videos and has over 30 years trading. Please enjoy the piece and watch his latest videos.

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By now, everyone has been well-schooled by the media on how dire the economic situation is in the USA, as well as globally. A massive credit contraction is in the process of wreaking havoc on one and all. After almost 70 years of non-stop credit expansion, the party appears to be over.  The result is plunging stock markets around the world, a collapse in real estate prices, commodities, and even oil.  Unemployment is moving higher, retail sales are off significantly, and the media has now announced what we already knew months ago - the economy is in a recession.

Now, there is no denying that the situation is very serious and, of course, the government is doing everything they are capable of to stave off the contraction and the consequences of deflation.

So the prevailing mood is one of "doom and gloom" – it's in the air, in the print media, radio, TV – you are programmed to believe that you are a hapless victim that can only hope for the government to save you.

As for us investors and traders – the message is there is little you can do in this environment except wait for our stock portfolios to recover, which may take years.

I strongly disagree with this notion and here's why.

There is at least one market that offers significant profit potential right now, hour by hour, day in and day out.  Whether you are a day trader or an end of day trader.  And it should be no surprise that I am referring to the Forex market.

The Forex markets have always offered great profit opportunities, but these opportunities get even better in times like these.  You see, with all of these economic cross currents and pressures that are working against other investment vehicles, they actually drive even better profit opportunity than normal in the Forex market.

For example, since this past July, the dollar has been in an almost unprecedented rally against other key currencies offering the savvy trader terrific profit opportunities.  The EURUSD pair has fallen by 3500 pips or $35,000 per standard lot, the GBPUSD pair has fallen by 5000 pips or $50,000 per standard lot, and the AUDUSD pair by 3000 pips or $30,000 per standard lot.  So while other more traditional markets are being decimated, the dollar rally has offered great opportunity.  But only for those with eyes to see it and a trading method to take advantage of it.

Make no mistake, there is plenty of risk associated with the Forex markets and for that reason you must have a good trading method to guide your trading that puts risk management first and foremost – because without it, you will lose.  But to better put this into perspective, I often use the analogy of driving a car.  Driving a car without understanding the rules of the road and without experience would be a very dangerous thing to do.  But with the proper training and guidance, as you received when you first learned to drive, you were able to enjoy the benefits of driving by first paying attention to and controlling the risk of driving.  I think of Forex trading in the same way.

Whether you are able to trade a large account or small account, standard lots or minilots, the mechanics of Forex trading are quite straightforward and easy to do, again with the proper guidance.

I believe anyone who wants to ditch the "gloom and doom" scenario and take control of the situation has the opportunity to do so by mastering a good Forex trading method that puts risk management first and in the process go from reliance upon others to becoming an independent trader.

For an in-depth technical look at how to spot profit potential today in the Forex markets, click here for a free, 3-part video training series.

Good Trading,
Bill Poulos

Watch Forex Vidoes Here

Here are TIPs to Protect Yourself from Future Inflation

Posted on by The INO.com Team

Today's guest blogger is Tony D’Altorio, a regular contributor for oxburyresearch.com. Originally formed as an underground investment club, Oxbury Publishing is an investment think tank second to none. The research team is comprised of a wide variety of investment professionals - from equity analysts to futures floor traders – all independent thinkers and all capital market veterans.

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This article is another in my series of articles about common mistakes that the average individual investor makes in their overall portfolio allocation. For these articles, I drew from the 20 years of experience I had at Charles Schwab in dealing with clients face-to-face and helping them meet their financial goals.

In previous articles, I wrote about two areas which were dramatically under-represented in most clients portfolios – commodities and international securities. There is a third area which I found to also be under-represented and that is fixed income investments. Many clients had little or no exposure to fixed income investments.

The most difficult task I believe for allocating funds to fixed income investments is to choose what type of bonds an investor should buy from the myriad of choices available. Obviously, an investor’s specific financial circumstances will dictate the final choices. In this article, I will choose an area of the fixed income world that I believe most investors should currently allocate funds toward.

TREASURY MARKET FANTASY

Right now the Treasury market is enjoying its own titillating little fantasy. It is the ultimate dream of everyone in the bond world. It is nirvana for bond market junkies. It is the D-word – deflation.

The media and financial authorities have fallen in love with the word deflation. The dim bulbs that appear on CNBC air are constantly talking about deflation. This fact alone sets off alarm bells in my head. When is the last time that the conventional wisdom as presented on CNBC ever came true? In fact, when is the first time?

I believe that all of this deflation talk is simply a way for the financial authorities to prepare the public for incredibly massive government spending over the next several years. It simply helps to justify even more massive government bailouts and spending programs. Look at the amount already spent on the “bailout” - nearly $8 trillion. I fully expect that figure to rise by tenfold or more.

I notice that CNBC conveniently seems to have forgotten about how the Treasury market crazies got it wrong in 2003. There was a huge deflation scare at that time too, although on a smaller scale than the current nuttiness. What followed that deflation scare? One of the most massive upward moves in history of the price of many commodities.

Right now, the Treasury market crazies have priced in massive deflation that will occur in the United States for the next decade or longer. They have also priced in corporate default rates of 21%! And this is in the face of massive printing of money and multi-trillion dollar annual deficits.

There is a major headwind that the Treasury market crazies will soon be facing. Over the next four years, 66% of America’s current $5.2 trillion of debt has to be rolled over. Who is going to buy all of this Monopoly paper?

Wall Street is expecting the suckers (foreigners) to buy it all. They seem to have forgotten that, thanks to Wall Street, these foreigners have major financial problems of their own. I strongly believe that most foreign investors’ funds will be spent in their home markets, buying their own bonds, and funding their own governments’ fiscal needs.

When this happens, the Federal Reserve will have to resort to cranking up the printing press to warp speed so that there is enough Monopoly money available to purchase the massive amount of Treasuries which will be issued. Can you say inflation?

MIS-PRICED ASSET - TIPS

In all of the Treasury market nuttiness, there are Treasury securities which have been completely mis-priced. These securities are Treasury Inflation Protected Securities or TIPS. The interest and principal on these securities are indexed to the U.S. Consumer Price Index or CPI.

TIPS have become mis-priced because liquidity has fled the TIPS market, just as liquidity has fled from the equity markets. After all, why would anyone want to own TIPS when everyone “knows” that deflation is here to stay and inflation is dead forever, right?

Wrong! For reasons stated earlier, I believe we will see a mass conflagration of the funds that are currently rushing into Treasury securities at zero or one per cent because of liquidity concerns. And once again, we will see that the conventional Wall Street wisdom will be proven incorrect.

I don’t believe we will ever see massive deflation in this country. I believe that the only possibility of  deflation in the US would be if we truly see 1930s conditions – where the US GDP collapsed by 50% in nominal terms and unemployment rates were at 25%  and corporate defaults were in the 15% range. Sorry, that scenario is not in the cards. What is much more likely is a return of inflation.

TIPS ETFs

An investor can buy an individual TIPS bond, but with the current lack of liquidity the spread between the bid and asked of such securities is unusually large. A better choice may be an ETF which invests in TIPS securities.

Currently, investors have two choices for TIPS ETFs. They are SPDR Barclays Capital TIPS ETF with the symbol IPE and the iShares Lehman TIPS Bond Fund with the symbol TIP.

Both ETFs have many similarities – both ETFs have very low expense fees, both ETFs are down between 7% and 8% for the year, and both ETFs also have a similar average duration of the TIPS bonds that they hold of approximately 7 ½ years.

The only difference seems to be that TIP trades with a higher daily average volume than does IPE and is therefore a bit more of a liquid security.

Due to the current mis-pricing I believe is occurring in the US Treasury market, both TIP and IPE are currently yielding in the 8% range. Keep in mind – this is an 8% yield that investors are receiving on a US Treasury security!

Investors are urged to jump on the bargains occurring currently with regard to the TIPS market. I believe that an immediate purchase of either IPE or TIP will be a wise choice.

Regards,

Tony D’Altorio
Analyst, Oxbury Research