12-22-09

What You Want to Hear

            For years, the government, Wall St. and the media all told you what you wanted to hear: that stocks, real estate and prosperity would continue up forever.

            For some- the informed few- they were right.

            But for most, their comforting words have been proven to be fatally wrong.

            Being part of The League of Power puts you squarely in the informed few, but that also means hearing it like it is, not how you want it to be.

            As you know, panic and stress is the order of the day. Psychological studies show that when people are stressed, their thought patterns only deal with the short term. An understandable reaction evolution equipped us with to survive. However, it also means that currently, people just aren't thinking straight and this is creating once-in-a-century opportunities. Always remember, there's money to be made by things falling as well as rising as we discussed in a recent newsletter.


Stones and Glass Houses

            I keep hearing things like: "Citibank issued a SELL on XYZ stock... Merrill Lynch say oil will drop below $30... yada, yada."

            And maybe they'll be proven right. But aren't they a little bit embarrassed to be opening their mouths at all??

            Is this the same Citibank trading as a penny stock (8 cents a share currently) that was so mismanaged that you and I, the taxpayer had to bail out? How are they an expert on anything?

            Is this the same Merrill Lynch that a few months ago said oil would hit $200 a barrel?

            On the Merrill Lynch case, think about a couple of important points:

1)      Companies like these ask you to hand over responsibility of your financial future to them: the 'experts'.

2)     As you can see, they're just chasing the market. Oil soars, they say oil is headed for the heavens. Oil drops, they say it will drop more. Does that take expertise?? Maybe we should use Merrill as a contrary indication of what to do?! But it's very simple when you think about it; of course, the analysts saying stuff like this aren't stupid- they just want to keep their job by NOT going against the grain.


"Gentlemen, Start Your Printing Presses!"

             So much for the 'experts. Let's move on to their partners in crime: politicians.

             The Federal Reserve has just sparked off a 'global competitive currency devaluation'. In basic terms, when a country lowers their interest rates aggressively and prints money like crazy, the currency devalues.

            Devalues against what though? Another currency. Which currency? The one deemed 'stronger'; the one who's printing less money and has a higher interest rate (there are other factors of course, like how stable the country is etc. but I'm referring to the large, industrial economies here).

            So, how will a devalued currency affect that country?

            Their products will be cheaper to other countries. Exports will boom.

            And that's good for the economy. It's how China has become so big; making stuff cheaper and having a currency that's kept artificially weak.

            Simple, right? Not so fast...

            That's all well and dandy when times are good. But now, it's every country for themselves. Other countries will be forced to do the same to stay competitive, hence the term, 'competitive currency devaluations'. It's a spiral.

             Fortunately, it SEEMS as though politicians learned the lessons from the 30's; import tariffs (as opposed to currency devaluations) and the subsequent retaliations caused a trade war. This was the REAL cause of the Great Depression. Though Obama has made noises about import tariffs (taxing imports to protect domestic manufacturers), I'm hoping, no PRAYING, that this was just pandering for votes in the election campaign. It's well intended, but ultimately far more destructive.

            But starting a 'currency devaluation race' is similar. Though not bearing such disastrous fruit as a trade war, an aggressive competitive devaluation amounts to a similar thing; a 'beggar thy neighbor' policy.

            Usually, recessions are unique to a certain country or two at a certain time. This time it's GLOBAL. The race is on between governments to see who can destroy their currency the fastest. It's a great time to be a currency trader...

Learn how here: http://www.leagueofpower.com/insidercode

...and the winner will be gold.

            Speaking of glass houses and stones, it's amusing to watch the government publicly condemn the fraudster Madoff for running a ponzi scheme. Isn't that what the social security system is?? Isn't that what the GM pension fund is? Money has been paid into it only to go elsewhere. Social security is a giant government run ponzi scheme which has nothing but a bunch of I.O.U.s in it.

            But not all politicians are bad. In fact, New York legislators constantly give me hope. They just introduced an 'obesity tax' on sugary drinks. Now here's a government that thinks logically; if people want to make themselves obese and take up two seats on the subway and fill ER rooms from heart attacks, fine, but they have to contribute more to state healthcare  and transportation etc. Love it! I think they should put a 'death tax' on cigarettes. Or perhaps a 'stupidity tax' on debt?


What to do?

            So dear reader, in light of all the craziness out there, what's a person to do? Well, what most people are doing is closing their eyes and hoping for the best or putting all their money into Treasury bills. They just don't have the stomach to do anything at all. They'd rather wait until their beloved media, government and 'experts' tell them it's safe. Will they ever learn?

            So why do I keep on saying there's so much opportunity around? Simply because there's so much irrationality in markets right now. Bargains on the table now that would normally have been snapped up are sitting there because so many fund managers are either scared to make a move or most likely, have to give so many customers their money back. Case in point, right now the price of gold is being held back because so many funds are being forced to sell their gold just to meet customers' refunds. Watch gold spike in late 2009 if not sooner as these redemptions die down.

            Oil is now so cheap that it's becoming cheaper to buy an oil company than it is to drill for new oil fields! Watch for a round of mergers and acquisitions in the oil sector in 2009.

            Same story for agricultural commodities like wheat. The low price of wheat (do people stop eating in a recession?) has made it less economical to farm. Add to that the fact that farmers can't get loans anymore and the crops will be way less. In 2009, traders will wake up to the fact and wheat will soar.

            And guess what? If my wheat and oil purchases don't come good in 2009, it won't be long after that they do. It's just a question of the market finally waking up to reality and thinking longer term than tomorrow.

            Property? Make no mistake, Obama and the Fed fully understand that putting a floor under property prices is the biggest fire to fight and will do everything they can, some of which I believe may surprise. I can tell you how to solve this in one simple move: make tenants of properties valued over 200k pay the property tax, not the landlord. Think about it. What Obama must do is make renting a nonsense compared to buying by lowering interest rates dramatically at the bank level AND guaranteeing loans to give banks the confidence to do so. There's no other way and they'll print as much money as it takes. If this success coincides with a stock market rally on a broad scale, I think we could see a comeback in the property market or maybe a floor in prices. We will probably see a further 10-20% drop in prices before that kicks in though. Right now a lot of people are waiting for a bottom in prices and if they think one is there, there could be a short term panic with first term buyers to get in there. Avoid this- instead, I would sell property.

            What about the general stock market? Well, I think it will be a very choppy ride thanks to earnings scares, more scandal and profit-taking, but I think 2009 will see what could be a vicious rebound in stock prices. If not, it will be a first in history after such a drop as this year's. Companies that were doing very nicely before October but are now trading at half that price or less, will come soaring back. What could fuel this will be a round of mergers and acquisitions. Already I'm hearing the mainstream media talk about a "new economy". It's probably not long before they start talking about a "new bull market". An incredible amount of money will be made from this rise, but when the sell-off comes at the end of it, it will be fast and brutal taking the Dow down to levels lower than now. This whole process may extend into 2010.

            But hey, what do I know? I don't work for the Fed, or Wall St. or the newspapers. And I'm certainly not pretty enough to be on CNBC! Only time will tell, but one thing's for sure: I ain't putting all my money in the Treasury for Uncle Sam to take care of- he'll just add it to the piles of dollar bills he printed already.

            I just watched "The Last Samurai" again last night. Here's an appropriate exchange I took from it:

            "You think a man can change his destiny?"

            "I think a man does what he can until his destiny is revealed."

            The hardest thing to master in being a contrarian investor is doing what everyone else thinks is stupid without actually being stupid! But common sense and a long term view usually prevail, even if it is a little scary along the way sometimes.

            If you'd like to learn more about the contrarian approach to life and investing, have a read of this: http://www.leagueofpower.com/theleague-letter

            Happy Christmas, Hanukah or whatever else it is you'd care to celebrate.  Remember, we've been through far worse things than this and now is a time to appreciate the things we take too easily for granted; family, health and freedom. We've learned to take something as simple as a good meal for granted when far too many people in the world would give anything to have the problems you have right now, however bad things seem. Use this break to regain some calm and perspective and let's talk again just before we put 2008 to bed next week (thank God!).
 

Best Regards,

Mark Patricks - Publisher

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