1-19-09

Free Money from the Government

This week (while we watch and wait for the markets to tread water) I'd like to address a scenario or two facing a lot of our readers.

Here's the first:

You're close to or at retirement age. You own your home and rely on a fixed income which has just been whacked by the stock market.

Understandably, this feels precarious right now. The home you paid for is going down in value and your investment income is slashed. It's actually worse than it appears on the surface too because the value of your dollar from that income is at risk from inflation ultimately caused by the government printing presses.

So what to do?

Well, you could think laterally. Mortgages are getting close to 4ish percent. There are solid bond funds paying 8%. Do the math. The 4% difference between the two is FREE MONEY. No, it really is free money.

If you took a mortgage out on your paid for home for $200k that's $8,000 a year completely free.

You want to hold some gold to protect your money against inflation but you need that capital to pay you an income- gold bars don't pay anything to hold them.

True. But there is a way to play on both sides of this game...

If you used big, blue-chip gold mining stocks to get an income in the form of a dividend, you would get your income AND be directly investing in gold. In fact, as the price of gold rises, you would make even more capital gain than had you bought bullion!

I don't own these stocks and you would need to check the dividend and other due diligence, but examples of larger gold and silver miners would be: Newmont Mining, Fresnillo Silver, Freeport and McMoran, Barrick Gold.

Despite the gold price holding firm and mining costs coming way down recently, many of these stocks are trading at very low levels right now. My recent prediction that gold would undergo a healthy correction came true but the metal was proven more resilient than I imagined- so far. I'm starting to wonder if the gold train really is leaving and we won't have much more chance. If it breaks decisively through the $1,000 mark, it will be well on it's way. $1,000 is a headline-making psychological number that the Fed are well aware of and have an interest in keeping down (though there's only so much they can do about it).

Okay, so what else is going on out there...?

More of the same. The stock market is still in a sideways trading range, but could have been in much worse shape under the circumstances. You could take this as a bullish sign short-term.

There are many stock market acronyms, most of them urban legends, but the 'January Barometer' is one that actually has some evidence. If the market finishes up in January, many large institutions see that as bullish and vice versa if it finishes down.

All we really know right now is that selling pressure is drying up but stocks are still falling (until last Friday) because there's also no buying.

As and when money does come back into stocks, it will be very selective buying. Certain sectors of the market will fare better than others depending on earnings reports coming out.

The government debt-building has just started. The numbers you're hearing now are just the beginning. They will simply print as much money as it takes and I believe we'll all be surprised by just how far they are willing to go to avoid the deflationary situation Japan had in the nineties.

The money the Fed will throw at this was not earned. It is and will be borrowed and printed. They are even printing money to lend to themselves!

It is DEBT plain and simple. Any smoke and mirrors to the contrary is delusory.

A government has only two ways to get out of debt or decrease debt:

1)      Raise taxes

2)     Cause so much inflation that the value of the debt is worth less.

Raising taxes won't win you a second term and it certainly won't get people spending again, so that really only leaves what's behind door number two.

Plain logic, right?

And the government make no secret that this is their intention. The question is, will they achieve it?

And this is what people argue about today. There's no historical precedent- nothing this big has ever been tried before- and so nobody can say with any certainty what the likely outcome will be.

Deflation/inflation. Isn't this just economic mumbo-jumbo? Trust me, the outcome of this will PROFOUNDLY affect you and your loved ones. This is no time to switch off and play dumb, leaving it to the politicians (read: replacement parents) to save us all. You have to take matters into your own hands and NOW.

Learn how to cash in on deflation/inflation with you own automated forex robot: https://lopsolutions.infusionsoft.com/go/lfap/LOP/

I keep hearing people say things like: "Oh, I got my 401k statement and I didn't want to see it." Ignorance will kill you.

There's no question that right now we are in a serious recession and deflation is happening if you term falling asset values and the price of 'stuff' as deflation (people argue about the true definition too!). The American consumer has, I believe, been permanently scarred, and has gone into hiding to lick their wounds and pray for the best.

Not exactly a good strategy, but hey, they don't call them 'the masses' for nothing.

Bernanke- the Fed chairman- once said he would drop money from helicopters if need be to avoid deflation. Like a general fighting the last war, he's fixated on Japan and the Great Depression deflationary precedents. And he's certainly acting in a contrary way to those governments at the time so it's fair to say he gets a different result and becomes (trumpet fanfare please) "the Fed chairman who beat deflation".

After all, it's insanity to do the same thing and expect different results, right?

Recessions are mostly psychological in my opinion- if people feel confident again they'll start spending again if they have the money. The circle just has to be jump-started in the other direction. Greed is still a prevalent force in Americans- if they feel they'll miss the boat on another boom they'll jump back in is my view. This anglo-saxon trait is less prevalent in Japanese culture- a reason why deflation took hold there and stands less chance here.

So what CAN I say with any degree of certainty?? This...

The Fed and government policy of printing/spending as much money as it takes to stave off a serious deflationary depression takes us squarely into uncharted waters (The Gold Standard prevented this in the Great Depression of the 30s). Don't listen to anyone who tries to compare this with anything in the past- they're talking nonsense and desperately trying to find something to label this with- the mass-media are the worst offenders of all.

If you took this to the extreme, you could simply print enough money to give every American say, $100,000 and buy a recovery.

So maybe the Fed has the cure for the depression disease. But like any 'wonder drug' that seems to cure the patient, questions: what nasty side-effect will it leave in its wake? In fact, will the treatment even go as planned?

We will see soon enough. In the meantime, I'd want to own something of real value no matter what happens... gold, silver and oil.

Until next time,
Mark Patricks.

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