Freedom by Friday Archives

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3-16-09

Lots to talk about this week and it ALL concerns YOU...

Wait. How can something that happens in China or Switzerland affect you? What does that have to do with your job, mortgage etc.

A LOT.

I've talked about this in past issues. If China suddenly decides all the US debt it holds is no longer a good idea, your mortgage interest rates will go through the roof. What's that you say? You've got a fixed rate mortgage so it won't apply? What about the rest of the economy though? Where do you think all the money you make comes from? The economy as a whole?

So please, don't be under the illusion you live in a bubble and are somehow magically immune to things I talk about here. You're not. EVERYTHING I speak of here affects YOU and most importantly, everything I tell you here you can make money from or at least protect yourself against.

So let's get on with it- much to talk about this time...

Speaking of China and her US debt, the Chinese premier publicly stated he was "worried" about the integrity of the dollar and how the US were inflating away the value of it.

Time to lock in those low interest rates.

China also said they are planning to diversify their investments. The head of the country's biggest Sovereign Wealth Fund, the China Investment Corporation, says he wants to invest in undervalued commodities instead.

For months now I've been talking about cheap commodities, especially oil. Looks like the Chinese government are League of Power readers.

Listen, when China starts buying, the world will know about it. And by commodities, that also means GOLD. Rumors are now circling in Asia that the Chinese want to buy 7 times more than their existing gold reserves and may even back the currency with gold.

This is huge if it materializes.

Meanwhile, the 'rock' of currency stability- Switzerland- is actively devaluing their currency.

One of the themes in my 2009 forecast was what I called a "competitive currency devaluation". The country with the cheapest currency has the best results for it's exports (by making them cheaper) and hence it's national deficit.

Basically, it's turning into a race about who can destroy their money the fastest and the USA currently has pole position on the starting grid.

If this continues, it could end badly. The last line of defense for your exports is to put up trade barriers. This was the main cause of the Great Depression.

We watch closely and pray governments really aren't as stupid as they seem.

Speaking of that, this week, Obama decided to give some investment advice. He said that "profit and earnings ratios" were favorable if you have a long term perspective.

I presume he was talking about 'price to earnings ratios'. How can an economics grad not know the correct phrase?? In any case, this may well come back to bite him at the next election.

He also talked about how the market bobs up and down daily and to ignore that. Up and down?? The market's been in freefall since he took over! And it would have been if McCain had got in too, but that's not the point.

Anyway, maybe he'll be proven right in the short term. This week we saw what was perhaps... just PERHAPS the start of what I predicted last week; the long-awaited bear market rally. I reserve judgment for now, but it looks hopeful.

But now I'm going to share something with you- perhaps the greatest lesson in trading/investing...
 
Let's consider what may have been the turning point in the freefall. When did this occur?

A bear market rally (may have) started when everyone gave up hope and STOPPED ASKING WHEN THE BEAR MARKET RALLY WOULD COME.

If this is the bear market rally, then when will it end?

IT WILL END WHEN EVERYONE STOPS QUESTIONING WHETHER OR NOT THIS IS A BEAR MARKET RALLY AND BELIEVES IT IS THE REAL DEAL; A NEW BULL MARKET.

The turning point has a sick habit of coming at the point of mass-capitulation. Same goes for gold and just about any other market. The fact that everyone is now speaking of gold at $2,000 is making me nervous and could be the cause of a big correction.

Even the legendary Warren Buffett falls for this. Last November he said he was buying and stocks went into freefall. Just before this recent rally he said things were "falling off a cliff" and could see no silver lining.

One thing Buffett did say that I agreed with though was that inflation has the potential to be worse than the 70s.

Amen.

A word on Buffett. He is undoubtedly a great investor. He applies the basic principle of finding value, buying that stock and sitting on it. 'Buy and hold'. He's been applying this during the greatest bull market in history. Let's see how he fares in the greatest bear market in history by applying that method...

Another important lesson about the markets: nobody knows anything for sure... apart from the insiders. Agreed?

So why not take a lead from the insiders?

At www.insidercow.com you can watch when company execs are buying their own stocks. Last Monday I bought Citigroup because I saw the top execs of the company buying millions of their own stocks. They knew something. Sure enough, Citi shares were up 78% this week on announcement those same bosses made.

It should be illegal, but it isn't.

But pay close attention to what's happening. I would ignore transactions worth less than a million. The bigger the transaction and the bigger the exec, the more I notice. It also helps to add your own thoughts- it is a fact that the government won't let Citi go and priced at a dollar there was limited downside.

Trading is far more common sense than anyone gives it credit for and most importantly, as you can see, there is money to be made in any market in any situation.

More notes...

The speed of change in consumer trends has been amazingly fast. Literally overnight, we've gone from 'bling-bling' culture to one where it's positively distasteful to show wealth. Take note of this even if you're employed by someone else- your company needs to quickly adapt to a more value-style approach rather than the bling thing... or it will fail. Frugal is the new 'cool'.

Home security. Needless to say, crime has gone up and will probably continue to do so as more people get more desperate. Perhaps you're noticing. I'd like to share just a couple of tips here with you...

1)     When parking at a shopping mall beware. The trick is to bump you from behind and tempt you to get out. If you don't, they'll try to mug you anyway. So be sure to park with a space free in front of you to allow escape and always lock your doors.

2)     If you do nothing else, just insert a simple block of wood into the running track on any patio sliding doors to jam entry.

Readers, please share any other tips you may have and we'll post them here!

So, the whole solution to this problem we're told is that banks need to start lending again.

But if they do, who's going to borrow??

Have any of the lawmakers thought of that? Or is all this a big dog and pony show to make it look like they're doing something when in fact, what's happening is people are just sick of living above their means?

Maybe the reason the change came so fast is that we all knew it was too stressful to live like this and we all welcome some frugality?

Anyway, I don't want to have shopping malls close down because of my words here so I came up with a little shopping list for you so you can do your part in keeping the economy going:

1)     Weapons and plenty of ammo (Smith and Wesson shares are soaring).

2)     Gasoline (add stabilizer and it lasts 2 years).

3)     12 months supply of freeze-dried food (try Mountain House)

4)     Back up power (preferably solar panels).

5)     Drinking water and/or water purification equipment.

6)     Home security devices.

7)     Small denomination silver and gold coins.

On the last item, I thought I'd see what the increasingly popular Wikipedia had to say about gold. The results were fascinating:

"In addition to making coins out of gold, governments also hold gold in reserve in case they need to make payments for international debts. In fact, the world's central banks hold about 20 percent of the aboveground supply of gold [source: World Gold Council]. The U.S. government stores its reserves in two locations -- the Federal Reserve Bank in New York City and the United States Bullion Depository at Fort Knox, Ky. Walk into either facility, and you would see bricklike bars, known as ingots, stacked like firewood. Each bar is 7 inches by 3.625 inches by 1.75 inches and weighs 400 ounces, or 27.5 pounds. In metrics, that comes out to a bar roughly 18 centimeters by 9 centimeters by 4 centimeters weighing a little more than 11 kilograms. Fort Knox currently holds 147.3 million ounces of gold (4.2 million kilograms). With a book value of $42.22 per ounce, that makes the Fort Knox holding worth $6.2 billion [source: United States Mint]!

­The demise of the gold standard has led to the rebalancing of those reserve portfolios. You can read more about the gold standard in this HowStuffWorks article on the New Deal, but here are a few basics. Countries on the gold standard will exchange paper currency for gold and will buy and sell gold at a fixed price. In 1900, with the passage of the Gold Standard Act, the United States formally adopted the gold standard, only to abandon it in 1971."

I wonder who and when will adopt the gold standard again...

Until next time,

Mark Patricks

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