Archive for April, 2011

Ben Bernanke yesterday made a statement to the world, and that statement was that the Federal Reserve is full steam ahead with quantitative easing.  They didn’t announce a QE3, but did indicate that QE2 would continue in full force until June at least because we remain in an “economic slump”.  My question to the Fed is, “What’s next?”  What happens when QE2 runs out in June and our government still needs $1 trillion in loans to be issued at 0% interest?  Again, we are looking at either a QE3, or a raise in interest rates or both.  The bad news, is that both of these actions will negatively effect our already depressed economy.  A raise in interest rates will be necessary to find new buyers of our debt, but will lower consumer spending, and will hit the stock market.  A QE3 means prices of food and commodities will go through the roof even further.  Now we all logically ask- what is the best solution?

There is only one road to saving our economy and our country.  That would be a massive cut in government the means of which we have never seen in the history of our great nation, along with a return to a monetary standard.  Our money has to be backed by something if we are going to see an end to our problems.  Even if we see both of these actions come into fruition, we are looking at a long depression, greater than the great depression before we recover and become a growing nation.  On this only road to fixing these problems, we will all feel the pain- but if we don’t go down this road, we will lose our country.  The costs are much higher on the current path, than they would be should we choose to massively cut government cuasing another immediate great depression. 

As we continue down the current road of QE, we risk the loss of our savings, our money, our freedom, liberty, and our American dream.  The great cause of our government has changed over time.  Our government that was once a protector of the people and representative of the people, has become a government that is protector of bank profits, and a servant to world government.  We now have a government that robs the wealth of its citizens all while dumbing down the population, and playing off of the uneducated masses. 

Looking to unemployment, an area that the government keeps telling us is getting better- we saw that first time unemployment rose again the week ending April 23, to 429,000.  Almost half a million people lost their jobs last week.  On top of that news, we received the first quarter 2011 GDP numbers, which came in at a whopping 1.8%.  Its amazing, most Americans don’t realize that even this 1.8% is inflated and we are actually not growing at all, but our economy is actually shrinking.  On my facts page, you can read my point on unemployment, where when you look at the history of all U.S. recessions, it has taken 2 years to re-employ the unemployed at 6% GDP.  We haven’t seen 6% GDP in years!  Is there any honesty left in government?  Month after month it is reported that we are recovering, and month after month we see the same high unemployment numbers and the same low GDP. 

In other reports, Exxon fired back at government on the subject of rising gas prices saying that it isn’t their fault.  Exxon claimed that most of their profits come from overseas, and that the government makes more money through taxes on gas per gallon than they do in profits.  Interesting isn’t it?  There was another report published in CNN Money today that stated that oil price increases are here to stay, and that the source of the problem is supply and demand.  I agree with half of the report, I do believe oil and gas price hikes are here to stay and they will get much worse, but it isn’t just due to supply and demand.  Our dollars are losing value daily, and a good portion of these price increases are inflationary.  No one in government or in the news really wants to admit that, but it is the truth.  Expect these prices to skyrocket along with everything else we need in daily life.  We are on the verge of a huge decrease in quality of living, and it’s coming fast. 

In international news, the Chinese Global Times is reporting that the Federal Reserve is continuing to engage in, and is even reinforcing an “ultra-easy” monetary policy sending the dollar to a 3 year low.  They state that most other large economies are continuing to tighten their monetary policies, and they expect the dollar to continue to lose significantly to the Euro and the Swiss Franc.  They also indicate that most market players are betting against the dollar as the Fed seems to be clinging to a near-zero interest rate policy.  It is amazing that the rest of the world realizes what is happening with our dollar, yet many of our own people seem to remain relatively relaxed and almost clueless.  The international community realizes where our path is leading, hence the tightening of their monetary policies.  That being said, China is tightening, but not as much as it should be.  It’s the same story with Europe. 

At the end of the day, the message is clear- “Full steam ahead.”  The destructive monetary policies of the Federal Reserve, accompanied by the unwillingness of government to cut their budgets all point to the same conclusion.  We continue to be in a waiting game of which domino will fall first.  Be assured the game is just beginning.  That’s all I have for today.

-John F. Haettich- 4/29/2011

 

Finally tax season has come to an end only to find the market for gold, silver, gas, oil and commodities soaring.  I think we are reaching the point that just about anyone will at least notice…..I hope.  Over the past few weeks, we’ve seen gold rally to over $1,500, silver today scraped $47, oil is still sitting around $112, and gas is climbing at an ever accelerating pace.  The news media is slowly starting to flash in a dose of this reality, but of course they continue to down-play the seriousness of our situation, and are vague at best in explaining why this is happening.  There is more of an effort to blame anything and everything for these problems, without identifying the true source. 

There is something interesting happening though.  Slowly, those that were laughing at the facts and forecasting of this website last year are changing their minds.  There is an awakening happening as we speak.  More and more Americans are waking up to something that just doesn’t seem right.  It is a feeling in the air maybe, or a sense of nervous energy all around us.  If anything I’d say that these rising prices of food, clothing, gas, and energy are enough to wake up anyone.  What’s more interesting is that many are awakening in a state of confusion.  I’ve heard frustrated friends and acquaintances say “Why is this all happening?”  I’ve also heard the question, “I don’t know what to expect next?” 

This is normal for anyone waking up to something that maybe they don’t fully understand at first.  Americans that have lived in a state of “fully trusting the government” are realizing that maybe this was a mistake.    The daily news of rising prices, lower wages, huge government debt, wars, deficits, and no answers surrounds our culture.  Soon things will really accelerate and many will say….. “I want to go back to sleep!” 

Some key news from this past week- firstly the S&P has lowered the U.S. credit rating to “negative”.  Talk about bad news.  So let’s say you are China, or Saudi Arabia, or even Japan- all large holders of US Debt and news comes out that the probability that you will get paid is not so good.  It is negative.  This is huge news and will change all of the rules in our relationships with these countries.  There has been a call by the Chinese bankers to limit the amount of Chinese reserves held in U.S. Dollars as a result of this news.  This is a big deal, and creates a huge problem for the U.S. Dollar. There was also news today that the IMF is now predicting that China’s economy will surpass the U.S. in the year 2015, and that the age of America is coming to an end.  You can see my “Suggested Reading” page for this article and others.  The writing is now so clearly written on the wall that anyone can see it.  Yet still a good portion of Americans remain asleep to all of this. 

Looking to Saudi Arabia, they for many years have been buying U.S. Treasuries as we have agreed to buy their oil.  A month ago, we received news here in the U.S. that Saudi Arabia would be producing more oil to make up for the shortfall of Libya.  Last week, the real news came out that Saudi Arabia had actually slashed production for last month by 800,000 barrels of oil per day.  Why do you think that is?  Why would Saudi Arabia cut production causing the price of oil and gas to skyrocket even further?  It’s simple- they are looking at all of the treasuries they have bought over the years, and are realizing they may not get paid.  They are realizing they played the game, and they may lose on their gamble.  Saudi Arabia has no reason to increase production for our sake, but rather I believe they now desire to push up the prices of oil and gas even further.  They’ve been “bamboozled” so to speak and now is their chance to get back at us!  Expect the price of oil and gas to continue upwards (with some corrections occasionally) because of lower supply and inflation. 

I had a conversation with someone yesterday about precious metals.  The comment was made “I should have got in and bought a while ago, but now gold and silver are so expensive”.  I instructed this woman to change how she views gold and silver, along with other commodities.  They aren’t expensive right now- I challenged her to see that they are still cheap.  These metals will continue their upward journey for years to come.  Silver especially is going to increase by leaps and bounds, as it is extremely undervalued right now.  Historically silver is 1/16 the price of gold, and today it is only 1/32 the price of gold.  I think you will see silver increasing by leaps and bounds over the next few years as it has been held artificially low.  Remember- it is still cheap, buy it while you still can afford it. 

Looking at the dollar, it is now again approaching its all time low of 2008 against the Euro.  The sad thing is it’s going to go much lower.  The dollar is deliberately being devalued by our government for reasons that are a mystery to all.  It is an unnerving intentional debasement, and for those that watch currency markets, it is just plain scary.  The government continues to have no care or concern that their deficits and quantitative easing will destroy our dollar, and that is cause for concern for all Americans.  All of these things are no longer a secret, as the mainstream is slowly leaking out more information about where these government actions are leading us. 

I encourage you, my readers to WAKE UP!  These things are happening whether you are awake or not.  You still have some time to strategize, and protect your assets.  I urge you to do your research, and pay attention to world news.  The days of the U.S. Dollar being “as good as gold” are over.  We are now in the days where the U.S. Dollar is as good as the paper it is written on, and those who hold all of their assets in the U.S. Dollar, or have their assets backed by the U.S. Dollar, will be the proud owners of a bunch of useless paper.  Don’t just believe me, do your research- and learn from history.  I have an interview with KRKS FM Denver’s Tom Moller, host of “Along the Way” this week, and it will be played on the station this weekend.  I will also post the podcast on my website later in the week.  That’s all I have for today.

-John F. Haettich- 4/25/2011

Budgets seem to be flying out from everywhere right now in Washington, given our major economic problems.  I was asked recently to take a look at “The People’s Budget”, a proposal that was put together by the Congressional Progressive Caucus for Fiscal Year 2012.  I finally had some time to take a closer look, and these are my findings. 

Let’s look first at their bottom line projections:  Deficit reduction of $5.6 trillion over 10 years, primary spending cuts of $869 billion, net interest savings of $856 billion, total spending cuts of $1.7 trillion, revenue increase of $3.9 trillion, public investment of $1.7 trillion, and a budget surplus of $30.7 billion in 2021 with debt at 64.1% of GDP.  The first thing that jumped out at me as a taxpayer is- a $3.9 trillion dollar increase in taxes with only $1.7 trillion in spending cuts, but let’s look closer.

When you read the technical analysis of The People’s Budget given by the Economic Policy Institute, there are some things that aren’t factual.  On page two of the report, is the following: “…and debt as a share of GDP is projected to gradually trend upward over this entire budget window, from a projected 68.9% of GDP in 2011 to 80.6% of GDP in 2021.”  In order to get to a better place, we first have to truly understand where we are, and this statistic is incorrect.  Debt as a share of GDP today in 2011 is not at 68.9%, but rather it is 97.3%.  As of March 25, 2011, our debt was $14.26 trillion, and our annual GDP was $14.66 trillion.  This report is off by 28.4% on debt to GDP ratio, a huge understatement of our current debt and not a positive initial sign. 

There are five categories addressed in this budget- public investment, Social Security, health care reform, Department of Defense spending, and tax reform.  Let’s start with “public investment.”  In the public investment section, this budget would authorize $30 billion in start-up costs for a national infrastructure bank that would leverage private financing to help rebuild America’s public capital stock.  This bank would also “guarantee private loans”, a business that we all know is disastrous as seen with Fannie and Freddie.  Has Congress not yet learned its lesson?  While infrastructure is important, banks have been at the source of our problems.  Funding another bank is like throwing more money into a bottomless pit.  I don’t believe funding the creation of another bank is a good idea in any budget at this point. 

This budget also funds $53 billion for the high speed rail project, a project that in these economic conditions isn’t wise.  The jobs created with high speed rail are temporary, and the cost far outweighs the benefit.  This is not a wise use of taxpayer dollars at this point and at the end of the day, we can’t afford it.  This bill also proposes raising the motor fuel excise tax by 25 cents as a direct funding mechanism for the Highway Trust Fund.  While this would generate $431.1 billion over the next 10 years, it is a tax on the middle class.  American families are already feeling the home budget squeeze with rising prices.  Adding another tax on their fuel prices will only squeeze those budgets all the more. 

Looking at Social Security, this budget would require raising the maximum taxable amount to $170,000 in 2012 up from 106,800 in 2011.  The taxable maximum on the employee side is gradually phased in over a 5 year period, while the corporate employer contributions for high earners would kick in immediately.  This will raise an additional $1.2 trillion over the next 10 years.  On paper, this does add up.  We are expecting an increase in Social Security costs over the next 10 years of $1.12 trillion, and this budget would cover that increase but there is an “if”.  The “if” is that at the end of the day, this budget is unfriendly towards corporations, some of which may decide to leave.  In other words, with action like this, there is a risk that large corporations will take operations elsewhere if they find it too expensive to operate.  How each company will handle this increase is up in the air, but again, on paper this does cover our expected increase in Social Security costs over the next 10 years should corporations decide to stay.    

The health care portion of this bill, in my opinion is deceiving.  Creating a public plan that is 5-7% lower in cost than private plans offered by private insurance companies will in the end create a monopoly on health care.  More simply stated, when given the option to pay more, or pay less for healthcare, the public majority will choose less.  What the public won’t factor in, are rising costs and rising taxes to support this system.  In any economy, a monopoly is a bad thing.  When you remove competition, you open the door to a decrease in quality, and an increase in price.  In the long term, under Obama’s health care plan- the costs are staggering.  I find that the CBO numbers showing lower deficits of $88 billion over the next 10 years with this plan to be drastically overstated. Rather I believe you will see an increase in our deficit and our debt under this health care plan.  The economics involved in a monopolized social health care system don’t add up.  As for the “Negotiating Drug Prices” portion of this budget, I think this is a great idea saving $100 billion over the next 6 years.  Pharmaceuticals have been widely overpriced over the past 20 years.  When there are options, there is always room to negotiate and this is why competition is so important.   

And now let’s talk about cutting defense budgets.  I think that this is one of the best ideas in this budget plan.  This plan calls for an end of the Iraq and Afghanistan wars, and a reduction in base department spending, saving $1 trillion over the next 10 years.  I would cut to an even greater extent here.  Our country has become too entangled in wars that don’t serve our interests.  Our military is here for our protection, and not world domination.  Cutting back on these wars is not only a wise foreign relations move, but economically it just makes sense.  If we continue the wars, expect deficits, debt, and dollar devaluation until extinction. 

Finally, the bill has a section for tax reform and modernization.  This budget calls for the allowing of the Bush tax cuts to end, which is coming sooner or later.  No big deal there, although this will affect the economy, lowering consumer spending.  There is however a lot of new taxes in this budget, not just for the rich, but also for the middle class.  This budget would tax all capital gains and qualified dividends (capital income) as ordinary income under the marginal tax rate structure.  This would be a huge tax burden on the middle class, raising $1 trillion over the next 10 years.  They want to tax all investment income as normal income- which at the end of the day will discourage investing.  I do like that this budget would limit the benefit on itemized deductions for high earners, as this is an area that is abused by the wealthy pretty often. 

The corporate tax reform portion of this plan may also scare away some businesses and draw them toward globalization overseas.  In addition, the “elimination of fossil fuel tax preferences” can be touchy, as natural resources companies pay the largest portion of tax revenues in the country, even with their current deductions.  This is a global business- I’m no stranger to oil & gas as I actively engage in consulting for large oil and gas companies.  A balance must be struck, as there are a lot of tax revenues at stake.  The country is so negative towards oil and gas, not realizing that most of our public services are largely funded by these same companies.  Also, there are just too many tax increases in this plan- an excise tax for various chemicals, an excise tax per barrel of crude oil (which again would be absorbed by the middle class), an increase in corporate income tax, and the taxing of foreign income as it is earned.  These are all items that will discourage business growth and at the end of the day, will increase unemployment. 

In conclusion, The People’s Budget plan- like all of the other budget plans from both sides of the isle is heavy on finding new ways to tax, and light on spending cuts.  The only major spending cuts found in this plan are in defense.  It is vital for our survival as a country that there are massive cuts across the board, leaving no department untouched.  There must be pain felt by all, and it is coming whether we procrastinate or not.  Also, in looking at debt to GDP ratio where it really is today (97%), this budget plan will leave us with a debt to GDP ratio of well beyond 100% within the next 10 years.  Our government doesn’t seem to understand, a balanced budget must be struck now or we risk our entire future as a free country.  Economics grants no favoritism; even for this great country we call the USA.  That’s all I have for today.

John F. Haettich- 4/15/2011

Most of us have already heard the news that the government was able to come to an agreement on the budget, averting a weekend shut-down.  Both sides finally agreed to cut $38.5 billion out of the budget for the remaining six months of the fiscal year.  I’m sure many government workers are happy and relieved with this deal, but this news leaves me deeply concerned.  My fear wasn’t that the government would shut down, rather I was afraid that it wouldn’t.  Let me explain. 

Our government has been successful in shaving off little bits and pieces of the deficit, but at the end of the day, our deficit is still over $1 trillion.  This means that our federal government will spend $1 trillion more than we have funding for.  How will this happen- well as many know, the Federal Reserve is engaged in a bond buying program called QE2.   They are in essence buying 70% of new treasuries issued by the government.  How can the Federal Reserve afford to do this?  Well it’s simple, they create new money, and when that runs out they just create more new money to the tune of more than doubling the money supply over the past two years.  The fact that the Federal Government is willing to operate at over a $1 trillion deficit is a key indicator that inflation will continue through this year. 

Quickly- For those that are new to economics, whenever paper money is created without backing, this is inflation (an increase in money supply).  The problem- looking at commodities, food, oil, gold, silver, cattle- there is a limited amount of these resources in our world.  Here we find ourselves with a limited amount of resources, being bought with an unlimited and growing money supply- so what does this mean?  Rising prices- that’s right! 

And here we are coming to the end of QE2 in June.  What will happen once QE2 ends and how will government function?  Well there are a couple of options.  The government could end QE2, watch markets fall quickly causing the initiation of QE3/more money creation to keep everything afloat while causing massive inflation and price increases like we’ve never seen before, or, the government could attempt to get treasury buyers from the outside again-but there’s a problem.  Interest rates are at 0%.  Do you know of anyone in this world that would invest in US Treasuries/government debt while our national debt is around $14 trillion, without getting any interest on investment.  Me either.  So the other option would be that the Federal Reserve would have to raise interest rates, and I mean raise them high enough so that outside buyers would want to buy them.  So why not raise interest rates?

The problem with raising rates isn’t in the action, it’s in the timing.  Our economy has never recovered from 2008, and we are hovering.  A raise in interest rates would mean a raise in the prime rate, the mortgage rate, car loan rates, CD rates, money market rates, and credit card rates.  This can cripple the economy in that it will negatively impact the stock market, business profits will fall, consumer spending will fall, home sales will fall, and of course borrowing will fall.  Talk about a situation where there is no good option.  Either way, we are headed for a depression type situation whether it comes from inflation which will eventually put companies out of business and force unemployment north, or through raising interest rates which will also cause massive lay-offs forcing unemployment upwards.  This new government budget agreement to me isn’t good news, but rather another kick of the can down the road. 

What can we do given this economic climate?  It is my belief that the Federal Reserve will eventually agree to a QE3, as the chances of drawing outside investors to buy their 70% portion of new treasuries is slim.  With QE comes rising commodity prices.  If you want to weather the storm, usually it is best to find a good strong wave to ride- and that wave is in commodities.  Gold this week was at $1,476/oz, hitting several all time highs.  Gold is up 33% over last year, and I see it going much higher.  Silver is also soaring, hitting $40/oz this week and is up 122% over last year.  Oil which I have been saying will go to $150-200 this year, hit $113/bbl this week and is continuing to rise.  Food commodities are also on the rise, and quickly.  Throughout the history of the world, whenever paper money was created without any backing, there is one universal conclusion.  When the paper money would finally and inevitably lose it’s purchasing power, the men holding the raw goods, food and metals in the end were the rich men.  I encourage you to learn from history. 

So enjoy this “good” news of a government budget agreement while it lasts, for the kicked can is coming up again soon.  Every time it is kicked, it flies less and less of a distance ahead.  Watch for QE3 or a raise in interest rates later in the year.  Also prepare for soaring prices in the second half of this year.  That’s all I have for today.

-John F. Haettich – 4/9/2011

It was about 6 months ago that I posted my last commodities update, so I figured it is time to check in.  Last year, I had listed Year-Over-Year changes in major food, energy, and precious metals commodities.  You may remember some of them:  Wheat was +74%, Corn +14%, Oats +68%, Canola +36%, Gasoline +25%, Beef +18%, Pork +60%, Coffee +27%, Sugar +44%, Cotton +66%, Gold +31%, and Silver +36%- all Year-Over-Year.  These values were from my November 11, 2010 report.  Government at the time of this report claimed that CPI was 1.1%. 

In that same report six months ago, I predicted that this was just the beginning, and that commodity prices were set to take off due to inflation created by the Federal Reserve.  Let’s take a look at where we are sitting today. 

COFFEE APRIL 2011 YOY:

 

As you can see Coffee is up 87.17% over last year, compared to 27% YOY from just six months ago.  Coffee has been one of the fastest rising commodities on the market.

COPPER APRIL 2011 YOY:

Copper is up 17.11% YOY.  Due to its highly industrial uses, don’t expect this to lag too far behind. 

CORN APRIL 2011 YOY:

Corn is up a whopping 111.83% YOY, compared to just 14% YOY only six months ago.  This is an extremely significant increase, and it will continue to climb. 

COTTON APRIL 2011 YOY:

Cotton has been getting a lot of attention lately- it is up 136.91% YOY, compared to 66% YOY in November 2010.  Prepare for a significant increase in the cost of clothing this year. 

GOLD APRIL 2011 YOY:

Gold is up a steady 26.38% YOY.  In November, it was up 31% YOY, but in March, Gold didn’t dip below 1,400/oz.  There have been some corrections with this metal, but gold generally has been on the steady rise, and I expect that steady rise to continue. 

OIL APRIL 2011 YOY:

Oil has seen significant increases in 2011 thus far.  Here you can see it is posting a 24.74% YOY increase.  Last year I predicted oil to go to $150-200/barrel, and I think we are seeing it move well into that direction.  Yesterday, oil was sitting around $108/barrel and rising.  I stress again, these are inflationary increases and they were coming regardless of what events are transpiring in the world.  Expect its continued rise. 

UNLEADED GAS APRIL 2011 YOY:

Unleaded gas is up 34.32% YOY, and expect its continued increase.  I’m expecting $4-5 gas this year at the very minimum, as predicted last year. 

SILVER APRIL 2011 YOY:

Silver is up an incredible 110.30% YOY, compared to 36% just six months ago.  In my earlier blogs I’ve mentioned that silver is extremely undervalued and poised for large increases.  We have only begun to see these increases, as I believe silver is going much higher.  My advice, buy it while it is still cheap. 

SOYBEANS APRIL 2011 YOY:

Soybeans are up 48.72% YOY, and I expect them to steadily rise this year as well. 

SUGAR APRIL 2011 YOY:

Sugar is still making significant gains, showing a 66.93% increase YOY, compared to 44% only six months ago. 

WHEAT APRIL 2011 YOY:

Wheat is up a significant 66.92% YOY, compared to 74% six months ago.  As you can see, the price of wheat continues to quickly rise, with no end in sight at this point. 

As you can see, commodities continue their upward trend.  Just this week, the CEO of Walmart, Bill Simon told USA Today that inflation is “going to be serious.  We’re seeing cost increases starting to come through at a pretty rapid rate.”  This is not “make-believe”.  These price increases are coming and they are coming quickly.  I expect things to really accelerate after June of 2011.  In the meantime, be wise and make some adjustments.  That’s all I have for this commodities update.

John F. Haettich- 4/2/2011