Tuesday, April 5, 2011

Adrian Douglas Demonstrates How The Fed Cooks Its Books (With PwC's Complicity)

It turns out that public and private US corporations aren't the only ones cooking their books, and that PricewaterhouseCoopers' consent can be easily purchased. Here is an excerpt from the Fed's 1999 minutes confirming that the books at America's central bank have been "fudged" on at least one occasion: "The Board’s staff and our accounting function at the New York Fed have worked out an accounting treatment to correct for both the $5 million and the $26.6 million errors. That involves reducing the accrued interest asset account by the entire $31.6 million, with an offsetting reduction in interest income on foreign currency investments. We will make that adjustment before the end of the year and spread it among all the Reserve Banks. Of course, for all of us with responsibilities for SOMA this is an embarrassing, indeed humbling, event. As a technical matter, though, I understand that PricewaterhouseCoopers is comfortable with the conclusion of both our accounting and audit function and the Board staff that this is not a material event for purposes of disclosure for any Reserve Bank." Perhaps PwC can come out, unsolicited for now, and disclose just how many other such borderline disclosable events it may have encountered while helping the Fed cooks it books in the past several decades?

From Adrian Douglas Of Market Force Analysis

Deception and Cover-up at the FED?

The title of this article is borrowed and modified from the book “Deception and Abuse at the Fed” by Robert C. Auerbach.

The minutes of each Federal Open Market Committee (FOMC) meeting are released within weeks of the meeting having occurred. The full transcript is available only five years later. I recently started reading in depth the transcripts of the FOMC meetings and discovered some shocking information. Let’s consider the December 21, 1999 meeting. The minutes can be found here while the full transcript is here.

In the minutes the Board unanimously accepted the accounts of the System Open Market Account:

The Report of Examination of the System Open Market Account, conducted by the Board's Division of Reserve Bank Operations and Payment Systems as of the close of business on September 10, 1999, was accepted.

One would think that there was nothing of interest to see here; just mundane approval of accounting. If we look at the transcript we get an entirely different picture that shows that the FED contemplated that there could have been fraudulent diversion of funds or errors in accounting in the famous Exchange Stabilization Fund (ESF) that has received so much attention from GATA as one mechanism for manipulation of the gold market:

CHAIRMAN GREENSPAN. Without objection. Peter Fisher, you wanted to discuss the report of examination, I understand?

MR. FISHER. Yes. I wanted to elaborate a little on Louise Roseman’s memo to Don Kohn about the unresolved difference between the internal accounting records of the Markets Group Accounting and Control Unit and those reflected in the Integrated Accounting System regarding the System’s net interest accruals on foreign currency investments. I thought it would be helpful if I gave a couple minutes of background, if you will bear with me.

Last spring, as members of the Committee will recall, we entered into a series of transactions with the ESF to re-balance our euro and yen holdings so we could come to a better split both in terms of total holdings and the currency mix. This involved a number of transfers of ownership of a series of investments and resulted in quite a significant amount of accounting activity. In the course of reviewing that, our own accounting staff identified an error that had been introduced in the prior year in our treatment of the premium on bonds held in the accrual account, overstating the accrual account by about $5 million. In the course of confirming that, they identified an additional $26.6 million overstatement in the accrual account for interest on foreign currency investments. We have had a number of staff members working full time trying to trace the source of that $26.6 million overstatement. They have worked back through the records to December 1994, before which detailed records at the transaction level just no longer exist due to the routine and appropriate destruction of documents.

The Board examiners were at our Bank to conduct an examination of the System Open Market Account in September and PricewaterhouseCoopers also has looked over our methodology to try to trace this overstatement back through time and find its source. PricewaterhouseCoopers is confident that we have traced it back as far as we can. They have tested our work papers and agree with our conclusion that we simply can’t go back any further.

There are two possible causes of this overstatement that we have to confront. One is the diversion of funds and the other is error. Now, we cannot rule out the possibility of a diversion of funds. But people from our own audit function and from Pricewaterhouse-Coopers have reviewed the control procedures we’ve had in place for the last decade and are very comfortable with the conclusion that these control procedures are sufficiently robust that the likelihood of diversion is remote. It cannot be ruled out, but for diversion to have occurred it would have had to involve the collusion of many people--just an extraordinary number of people--on several different staffs. If anything, our control procedures run a little to the “belt and suspenders” direction in regard to control of the flow. So, there is reasonable confidence that no diversion of funds occurred. The much more likely cause is a simple accounting error. The failure to credit the accrual account when cash was received would have left this account overstated. But we have worked the accounting back as far as we can take it and cannot find the erroneous entry or entries.

Dave Sheehy, the New York Fed’s General Auditor, and I are both looking into a fundamental reappraisal of our control procedures. We have introduced an additional mechanical check to maintain detailed records of the accrual stream by instrument, so that when a final principal payment is received we can trace the record all the way back on each instrument and double check the accounting.

More fundamentally and more importantly, what troubles us is how we could have gone for so many years without scrubbing this account more vigorously. That is something we are looking into and we are going to be revising our control procedures--both the audit procedures and those in our own Markets Group. The Board’s staff and our accounting function at the New York Fed have worked out an accounting treatment to correct for both the $5 million and the $26.6 million errors. That involves reducing the accrued interest asset account by the entire $31.6 million, with an offsetting reduction in interest income on foreign currency investments. We will make that adjustment before the end of the year and spread it among all the Reserve Banks. Of course, for all of us with responsibilities for SOMA this is an embarrassing, indeed humbling, event. As a technical matter, though, I understand that PricewaterhouseCoopers is comfortable with the conclusion of both our accounting and audit function and the Board staff that this is not a material event for purposes of disclosure for any Reserve Bank. I would be happy to try to answer any questions.

CHAIRMAN GREENSPAN. Is there any evidence of a surprising rise in standards of living of key people involved?

MR. FISHER. No, there is not.

CHAIRMAN GREENSPAN. Has somebody looked?

MR. FISHER. Yes, we have looked into that. Many of the staff people are still at the Bank, though others are not. But we have found nothing of that nature.

CHAIRMAN GREENSPAN. Were it an embezzlement, prior to what period would it have occurred?

MR. FISHER. We only know that the difference existed prior to December 1994.

CHAIRMAN GREENSPAN. It could have been any time prior to that? Is there a beginning point, other than 1914?

MR. FISHER. The details certainly don’t exist for pre-December1994 records, so I don’t know how we could determine the beginning point--in 1973 or 1963 or where. Prior to 1994, the only interest income we were receiving in that account was coming from the BIS, the Bundesbank, and the Bank of Japan. So the source of the income was official institutions. It was really a very simple accounting process to bring that income in at that point; the complexities have been introduced since that time. So, as I say, Pricewaterhouse-Coopers and our audit function are confident in looking over the control procedures we have had in place that it’s implausible that a diversion could have occurred. But we cannot rule it out.

What is the solution to this accounting problem? Just fudge the accounts! They reduced reported income to make the 31.6 million dollar problem go away. Here is a repeat of the relevant section:

The Board’s staff and our accounting function at the New York Fed have worked out an accounting treatment to correct for both the $5 million and the $26.6 million errors. That involves reducing the accrued interest asset account by the entire $31.6 million, with an offsetting reduction in interest income on foreign currency investments. We will make that adjustment before the end of the year and spread it among all the Reserve Banks. Of course, for all of us with responsibilities for SOMA this is an embarrassing, indeed humbling, event. As a technical matter, though, I understand that PricewaterhouseCoopers is comfortable with the conclusion of both our accounting and audit function and the Board staff that this is not a material event for purposes of disclosure for any Reserve Bank.

It is shocking that PriceWaterhouseCoopers should be “comfortable” that this is not a “material event” for the purposes of disclosure! Clearly the system is set up to deliberately deceive the public and avoid any transparency. Full transcripts of the FOMC meetings are only available after five years…and what is the time limit before they destroy detailed records?...you guessed it: five years!

But there is more deception revealed in the transcript on an entirely different topic: Greenspan claimed that the Fed can not recognize a bubble until after it has burst. That is a lie as shown by another section of the transcript:

MR. PRELL: All of this may well be stretching the point statistically, but I think it’s worth sounding a note of caution that strong productivity gains and intense competition--even accelerating productivity and intensifying competition--do not by themselves ensure that there can be no step-up in inflation. Unless supply is completely elastic, which seems unlikely in the short run, demand can become excessive.

That, we fear, is the current situation, with the rising stock market overriding the effects of monetary tightening. Once again in recent weeks, the market has defied our notions of valuation gravity by posting an appreciable further advance. Moreover, it has done so in a way that seems to highlight the risk that it will continue doing so. I refer to the incredible run-up in “tech” and e-commerce stocks, some of which have entered the big-cap realm without ever earning a buck.

To illustrate the speculative character of the market, let me cite an excerpt from a recent IPO prospectus: “We incurred losses of $14.5 million in fiscal 1999 primarily due to expansion of our operations, and we had an accumulated deficit of $15.0 million as of July 31, 1999. We expect to continue to incur significant...expenses, particularly as a result of expanding our direct sales force…. We do not expect to generate sufficient revenues to achieve profitability and, therefore, we expect to continue to incur net losses for at least the foreseeable future. If we do achieve profitability, we may not be able to sustain it.” Based on these prospects, the VA Linux IPO recorded a first-day price gain of about 700 percent and has a market cap of roughly $9 billion. Not bad for a company that some analysts say has no hold on any significant technology.

The warning language I’ve just read is at least an improvement in disclosure compared to the classic prospectus of the South Sea Bubble era, in which someone offered shares in “A company for carrying on an undertaking of great advantage, but nobody to know what it is.” But, I wonder whether the spirit of the times isn’t becoming similar to that of the earlier period. Among other things, it may be noteworthy that the tech stocks have done so well of late in the face of rising interest rates. Earlier this year, those stocks supposedly were damaged when rates rose, because, people said, quite logically, that the present values of their distant earnings were greatly affected by the rising discount factor. At this point, those same people are abandoning all efforts at fundamental analysis and talking about momentum as the only thing that matters.

If this speculation were occurring on a scale that wasn’t lifting the overall market, it might be of concern only for the distortions in resource allocation it might be causing. But it has in fact been giving rise to significant gains in household wealth and thereby contributing to the rapid growth of consumer demand--something reflected in the internal and external saving imbalances that are much discussed in some circles. Whether our assumed 75 basis point increase in the fed funds rate would be a sufficient shock to halt this financial locomotive is open to question.

The FED clearly recognized the tech bubble and even made reference to the infamous and most speculative “South Sea Bubble”. But they did not want to do anything because it was making the whole economy expand due to the wealth effect:

If this speculation were occurring on a scale that wasn’t lifting the overall market, it might be of concern only for the distortions in resource allocation it might be causing. But it has in fact been giving rise to significant gains in household wealth and thereby contributing to the rapid growth of consumer demand.

Greenspan lied that they could not recognize a bubble in advance. They did recognize it and even compared it to the South Sea Bubble and they purposefully let it continue because it was adding to household demand, a large part of that being driven by housing demand, and it was all founded on companies that had no or little fundamentals that were commanding ridicules valuations that were bound to crash bring the entire economy with it. And that is what happened.

This transcript shows that the FED can not even manage the multi-billion dollar ESF fund, how can they be trusted to run a multi-trillion dollar bail-out operation as was instigated in 2008? The answer is we can’t; the recently released list of banks and institutions who received TARP funds and how much due to an FOIA request of Bloomberg reveals that yet again the FED deceived the congress and the public by requesting the TARP funds to bail-out America but much of the funding went to foreign institutions! The transcript shows that when it discovers an accounting problem it fudges the accounts and decides that this is not a material event that needs to be disclosed in the Annual Reports of the Federal Reserve Banks! The Federal Reserve acts as the supervisor and regulator of the banking system. Clearly such breaches in fiduciary duties and accounting standards explains why the banks they supervise can thumb their noses at any banking regulations and run fast and loose with off-balance sheet transactions, report falsely inflated and often record profits coming out of the biggest recession and banking crisis in 80 years and pay their executives obscene bonuses.

The FOMC transcripts only give us a small glimpse of what is really happening in secret at the FED but from just scratching the surface one can be justified in extrapolating that it is hiding a web of corruption, lies and deceit. This band of liars and cheats are responsible for the only global reserve currency, the US dollar. If you own and hold bullion instead of US dollars there are no counterparties, let alone counterparties who lie every time they move their lips, and operate under a shroud of secrecy which is only partially lifted after five years, which is coincident with the destruction of all detailed records.

Chart of the Week: Crude Oil and Transports

With crude oil prices hovering around $108/bbl. level, it is only natural to begin wondering just what kind of impact crude prices will have on stocks.

Looking back at recent history, crude oil and stocks have been positively correlated, largely because an improving economy translates into increased demand for crude oil. At some point, of course, rising crude oil prices are going to translate into a drag on GDP and on equities. Consensus estimates for the impact of crude oil on GDP generally assign about a 0.25% drop in U.S. GDP for every $10 increase in crude oil.

Whether the negative correlation between crude oil and stocks begins to become apparent at $110 or perhaps at higher levels remains to be seen.

When oil prices begin to be a significant drag on stocks, it will likely show up first in the transportation sector. Looking at the Dow Jones Transportation Average (DJTA) and (West Texas Intermediate) crude oil prices since the beginning of 2010 in this week’s chart of the week, it is obvious that the positive correlation between crude oil prices and transports has continued all the way up to the present. While I expect this positive correlation to end shortly, as long as transports continue to move up in concert with rising crude oil prices, investors should feel comfortable with their long positions in equities.

Daily Market Commentary: Markets Finely Poised

There wasn't a whole lot going on in lead indices. The S&P finished with a low volume doji which could offer a swing trade opportunity on break of high/low (stop on the flip side). Technicals are bullish and rising, so the expectation is for a break to the upside. But a double top can't be ruled out either - for this to confirm it will require a (swift) move back and below 1,260.


via StockCharts.com

The Nasdaq finds itself with another indecisive doji (next to Friday's shooting star) bang on gap resistance. The February gap down dominates and if it's a true breakdown then it's a gap which cannot be filled. Should the gap fill then 2,840 won't be long for resistance. Aggressive bulls can buy break of 2,800, while shorts will be looking to cover around 2,832.


via StockCharts.com

Helping bulls is a confirmed net bullish stance in Nasdaq Bullish Percents and Summation Index


via StockCharts.com

via StockCharts.com

Semiconductors suffered a third day of losses having been pegged by declining resistance. But the afterhours buyout of National Semiconductor by Texas Instruments will generate plenty of interest in this sector tomorrow. But bulls have their work cutout. The first challenge is to crack above declining resistance and nearby 50-day MA. Then it can go on to challenge the 2011 high. Strength in semiconductors will also help the Nasdaq and Nasdaq 100.


via StockCharts.com

While the Russell 2000 broke the bearish divergence in its MACD.


via StockCharts.com

Tomorrow will be very interesting. I suspect bulls will be the happier, but bears are not without opportunity from breakdown gaps and/or double tops. On a positive front, tight stops can be played on both sides of the fence.

The Kings of Cash Flow - Investment Ideas: MSFT, PG, IBM, VZ

What is the value of a stock?

If you ask most people that question, they will likely pull up the company's stock quote from a financial website and give you that number. But they're confusing price with value.

Popularity Contest

Ben Graham, the father of value investing observed:

In the short-term, the market is a voting machine. In the long-term, it is a weighing machine.

In other words, the stock prices of both good and bad companies can move rapidly for several reasons in the short run. But over the long run, only the strong companies thrive.

So what is the real value of that piece of paper you hold? Is it worth anything at all?


When you buy a stock, you're actually buying an ownership interest in a company. And the value of any business is the present value of all of its free cash flow.

Free cash flow is a very useful measure of a company's true profitability. It is calculated as:

Cash Flow from Operations
- Capital Expenditures

Both of these items can be found on the Statement of Cash Flows.

Companies that generate substantial free cash flow can hold onto that cash, pay down debt, buy back stock, or distribute it to shareholders through dividends.

The Kings of Free Cash Flow

So what companies are currently generating substantial free cash flow for their owners? Here are 4:

Microsoft (MSFT) may have had its missteps lately, but its Windows operating system and Office business software are still huge cash cows for the company.

Microsoft generated over $22 billion in free cash flow in 2010, a 72% increase from 2006. The company has been using its cash to buyback stock and raise its dividend. It currently yields 2.5%.

It trades at just 10x free cash flow, a significant discount to the industry average of 24.8x. It is a Zacks #3 Rank (Hold) stock.

Proctor & Gamble (PG) is about as stable as they come. The company markets more than 250 products to more than 5 billion consumers around the world.

In 2010, P&G generated over $13 billion in free cash flow, and it returned nearly $11.5 billion to shareholders through stock buybacks and dividend payments. It currently yield 3.2%.

Proctor & Gamble trades at 11.1x free cash flow, a discount to the industry average of 17.1x. It is a Zacks #3 Rank (Hold) stock.

International Business Machines (IBM) may be famous for its hardware business, but it has been (successfully) transitioning to a services firm, which now accounts for more than half of total revenues.

IBM has been aggressively buying back its stock. In 2010, Big Blue spent over $15 billion repurchasing its common stock.

The company has also been steadily raising its dividend. Since 2002, IBM has raised its dividend every year and at a compound annual rate of 18.6%. It currently yields 1.6%.

Shares are trading at 12.7x free cash flow. It is a Zacks #3 Rank (Hold) stock.

Verizon Communications (VZ) may spend close to $17 billion on capital expenditures every year, but the company takes in nearly twice that in operating cash.

The company has been consistently increasing its free cash flow year after year, and it has been rewarding its shareholders as a result. It has been aggressively paying down debt and still has room to pay a dividend that yields a juicy 5.4%.

Verizon trades at just 6.4x free cash flow, well below the industry multiple of 10.3x. It is a Zacks #3 Rank (Hold) stock.

Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.

April 4th 2011 Stock Market Recap with Silver Chart

Not much price volatility today as the indices traded in a narrow range and closed flat. This is a welcomed rest considering the rally of the last few weeks and with some further horizontal work the major indices should be moving back higher. Alternatively If we do see a pull back, the uptrending 50 MA or even the 10 MA will serve as key support.

I last posted a chart of Silver with the March 30th recap and noted that momentum was showing higher highs looming. Today we saw just that as Silver gapped to fresh all-time highs with the Silver ETF, ticker SLV, closing above $37. Chart below. Silver Stocks in focus: AGQ (2x Silver ETF), SLW, PAAS, CDE, SVM, ANV, SSRI.

Trend Table
TrendNasdaqS&P 500Russell 2000

(+) Indicates an upward reclassification today
(-) Indicates a downward reclassification today
Lat Indicates a Lateral trend

*** I’m simply using the indices’ relations to their 200, 50 and 10-day moving averages to tell me the long, intermediate and short-term trends, respectively.

Technically Precious with Merv

For week ending 01 April 2011

Looking at a short term chart it sure looks like we are forming a double top here (see chart below). If so that could take us to at least the lows of early Jan. Time will tell. The weakness in the trading has been mentioned before, it still is there. We need a strong move into new highs to overcome.



The long term indicators continue to be in their positive territories but they do seem to be weakening. Gold remains above its positive sloping long term moving average line although with the price in a basic lateral trend and the moving average sloping upward the two are closing the gap. It will still be some time before the gap is closed but that's the direction things are headed at the present time. The long term momentum indicator remains in its positive zone but moving sideways with a slight negative bias. On Friday it once more dropped below its slightly negative sloping trigger line. As for the volume indicator, it is still positive but has started to show weakness lately. It remains above its positive trigger line. At market tops one should not put too much emphasis on a positive volume indicator. Too often the volume indicator is a lagging indicator at tops. It's the negative volume indicators at market tops that mean something and that one should really pay attention to. For now the long term rating remainsBULLISH.


We’ve had a few up and down reversals in the intermediate term over the past few months. For now we are in positive territory but for how long? I’ve mentioned that short term potential double top that may be in the formative stage. If completed it should take gold to its previous Jan low. At that point we then just might have an intermediate term double top that if verified by a move below the Jan low could take us all the way back to the low of last July, to about the $1170 area. But that’s getting way ahead of ourselves, let’s take things one at a time.

For now gold is above its positive sloping intermediate term moving average line but the gap between the two is not all that wide and it is closing. Over the past month as gold was into new all time highs the intermediate term momentum indicator has been showing significant negative divergence. It is still in its positive zone but has dropped below its negative trigger line. Negative divergence such as this should not be ignored. It’s better to be safe than sorry at a time like this and maybe just relax and wait for a better confirmation of the on-going activity. That being said we are still showing positive indicators. The intermediate term volume indicator has, however, dropped below its trigger line although the trigger is still in a slight upward slope. Putting the indicators together we still have a BULLISH intermediate term rating although weakening. The short term moving average line confirms this bull by remaining above the intermediate term moving average line.


Shown on the chart are three up trend lines, two solid and one dashed. They form my FAN PRINCIPLE trend lines for a bearish decelerating FAN. The third line for now is just a guess as the action has not gone that far. For those who are new to these commentaries or have forgotten, we often get a series of trend lines that form a fan. There are many different texts that define their view as to what these fans signify, if anything. I have a simple criteria. For a bearish decelerating fan (or its opposite, a decelerating bullish fan) the breaking of the first FAN trend line is usually a none event as far as the FAN PRINCIPLE is concerned. It could by itself be a trend reversal but that’s another story. The breaking of the second FAN trend line is the reversal signal with the breaking of the third FAN trend line as confirmation. I have no real criteria as to how far the reversal move should go but a move back to the apex point is as good as any. It is also not unusual for the action to get trapped between FAN trend lines which then act as support and resistance lines. Based upon the time it took this pattern to form I would call it an intermediate term pattern.


During a lateral trend as we have had over the past few weeks the indicators get all muddled up. They go positive one day and negative the next. As of the Friday close gold is still in a lateral trend. However, it had closed above its positive short term moving average line. The momentum indicator is sliding just above its neutral line but on Friday it once more dropped below its trigger line. The line has likewise turned downward. As for the daily volume activity, that would also be negative. When compared to the average 15 day volume line we see that the better days were days of negative gold price moves, not good. However, from the indicators we are still BULLISH as far as the short term is concerned. It looks like the $1410 level is one to watch out for. The short term bull is confirmed by the very short term moving average line which remains above the intermediate term line.


When looking at what silver is doing we most often compare it to the performance of gold. Here, with the silver chart, we have a direct comparison on the short term activity of both. The first thing that jumps out at you is that the price performance of silver seems to be somewhat stronger than the price performance of gold (see previous chart). That seems to be the only major difference in the two charts. The short term momentum indicator is giving us a negative divergence which seems to suggest that the better price move may not be all that credible. We have a potential bearish decelerating FAN trend lines same as gold. The daily volume action is not all that impressive although the volume indicator (not shown) is still quite positive. The price to watch here is the $36.50 level. A close below there would break below a short term support, below the short term moving average line AND below the second FAN trend line for a bear signal. Otherwise, at this point in time all three time periods are still giving us aBULLISH rating.


Checking out the performance of the gold and silver stocks this past week we get a different picture if you go to the major North American Indices versus the Merv’s Indices. The North American Indices were mostly slightly on the positive side while the Merv’s Indices were mostly slightly on the negative side. Looking at the currency performance table (not shown in most commentaries) this slight difference can be explained by the difference in currency performance between the U.S. $ and the CDN $.

Starting to be a concern lately is the performance of my Penny Arcade Index. Once more it was on the down side and even adjusting for currency differences would still be on the negative side. It is clearly in an intermediate term bear market with the intermediate term momentum indicator just about to go into its negative zone for the first time since it went into the positive zone in Jan of 2009. The Index needs to turn around fast or the momentum move into the negative zone will take place. It should be noted that the Table of Technical Information and Ratings shown here at the end of each commentary uses slightly more aggressive indicators than I use when I do my normal analysis so its ratings may be a week or so ahead of my visual analysis. This is most noticeable in the long term information and ratings. Visually the Index is still well above its positive sloping long term moving average line and the long term momentum indicator is still in its positive zone (although moving lower fast). I would be inclined to go with my visual analysis but for the slightly more aggressive investor, the table ratings are okay. Being slightly more aggressive the table ratings give you a reversal notice ahead of the visual analysis BUT this comes with a price, that of being somewhat more susceptible to the whip-saw effect of false reversal notice.

The importance I place on my Penny Arcade Index, as long term readers may remember, is that during a major top reversal the speculative and gambling stocks get hit first and provide an advance warning of the up coming reversal of the overall universe of stocks. We are starting to get just that kind of warning although it still needs more work.

Merv’s Precious Metals Indices Table

Well, that’s it for this week. Comments are always welcome and should be addressed to mervburak@gmail.com.

Merv Burak, CMT

WSJ: Fed's Low Interest Rates Crack Retirees' Next Eggs

This front page story in the Wall Street Journal could have been ripped from the virtual pages of FMMF over the past few years. [Mar 31, 2010: Ben Bernanke Content to Sacrifice American Savors to Recapitalize Banks and Benefit Debtors] Essentially we have had a huge wealth transfer from the savers of America to the bankers and debtors - hence once again prudence is punished in this country. I never had a way to quantify it but bank analyst Chris Whalen estimates the price tagat $750 billion annually. That's a massive implicit theft of the saving class.

Bigger picture, the incentive system our central command has built for the worker rats in America is quite amazing... First, don't save... go spend (or the terrorists have won). If you do save, we will punish you with nearly invisible interest rates. Hence, use that money to go speculate - get in the stock market, immediately. Last but not least... if you don't pay your mortgage we have government programs to reward you - of course we cannot help until you've not paid your note for at least 6 months. If you are sacrificing to make the payment and ask for help, we can't help you - sorry. Or even better just don't pay and live for a few years rent free... and to go full circle, use the money you saved to either (a) speculate or (b) spend [see points 1 and 2] Understood? Did I mention no cost of living adjustment for those on fixed income because there is no inflation?


  • .....with short-term bank CDs paying less than 1%, the World War II veteran expects his remaining $45,000 stash to yield just a few hundred dollars this year. So, he's digging deeper into his principal to supplement his $1,500 monthly income from Social Security and a small pension.
  • "It hurts," says Mr. Yeager, who estimates his bank savings will be depleted in about six years at his current rate of withdrawal. "I don't even want to think about it." Mr. Yeager is among the legion of retirees who find themselves on the wrong end of the Federal Reserve's epic attempt to rescue the economy with cheap money.
  • A long spell of low interest rates has created a windfall worth billions to banks, mortgage borrowers and others it was designed to benefit. But for many people who were counting on their nest eggs, those same low rates can spell trouble.
  • Mr. Yeager's struggle highlights a nagging dilemma facing Fed Chairman Ben Bernanke. The longer the central bank keeps interest rates low to stimulate the economy, the more money it pulls out of the pockets of millions of savers. Among the most vulnerable are retirees, who have few options to restore lost income on investments built up over entire lifetimes.
  • In 2009, according to the most recent data available from the Labor Department,average annual investment income for the 24.6 million American households headed by people 65 and older amounted to $2,564. That figure is down 34% from 2007, and is the lowest since 2003.

  • A recent survey by the Employee Benefit Research Institute indicated that one in three retirees had dipped deeper than planned into their savings to pay for basic expenses in 2010.
  • As of January, the average interest rate paid on relatively safe vehicles such as short-term savings accounts, time deposits and money-market funds stood at only 0.24%. That's one-tenth the level of late 2007 and the lowest on records dating back to 1959.
  • Such depressed rates don't come close to compensating for inflation, which was running at an annualized rate of 5.6% in the three months ended February.
  • "Americans who have done everything right, have worked hard, saved their money and stayed out of debt are the ones being punished by low interest rates," says Richard Fisher, president of the Federal Reserve Bank of Dallas and a voting member of the Fed's policy-making open market committee. "That state of affairs is not sustainable for a long period of time."
  • Low rates don't just hurt retirees. They also penalize people of any age hoping to build up funds for the future, and discourage rainy-day savings that could make U.S. consumers more resilient to job losses and other financial jolts.
  • Americans' net contributions to their financial assets, such as bank and 401(k) accounts, amounted to 4% of disposable income in 2010, according to the Fed. That's the lowest level since it began maintaining records in 1946—except for 2009, when people actually pulled money out.
  • By contrast, the Commerce Department's broader measure of personal saving has risen, to 5.8% of disposable income in 2010 from a low point of 1.4% in 2005. That's in large part because it counts reductions in personal debt, such as mortgages and credit-card balances, as savings. For example, paying down a credit card with a 20% interest rate is a better way to save money than taking out a bank CD yielding 1%. But defaults, rather than saving, have driven much of the decrease in debt.
  • .....more retirees are getting into riskier positions as they try to avoid running out of money, says Neil Kasanofksy, a financial adviser in Port Charlotte who has a largely elderly clientele. "The fear is palpable at this point in their lives," he says. "Given the low level of interest rates, you're hard-pressed to tell someone to get into bonds or 10-year CDs."

Government Debt Could Weigh Down Your Portfolio

U.S. Treasuries have been called one of the safest investments you can make. The idea that the U.S. government would default on its obligations used to be akin to a snowball's chance in hell.

Now, some analysts aren't so sure.

From Bloomberg:

[Bill] Gross [who runs the world's biggest bond fund at Pacific Investment Management Co.] said in an interview March 11 that he eliminated government-related debt from his Total Return Fund because investors aren't being adequately compensated for the risk of quickening inflation.

He's not alone. Bloomberg also reports that Warren Buffett has been advising against holding long-term fixed-dollar investments like Treasuries. He told investors at a conference in New Delhi, "If you ask me if the U.S. dollar is going to hold its purchasing power fully at the level of 2011, 5 years, 10 years or 20 years from now, I would tell you it will not."

Indeed, in the first quarter of 2011, Treasuries showed a 0.1% loss... And that's on top of the 2.7% loss in the last quarter of 2010.

And now, even the debt-guzzling Federal Reserve is warning of inflation.

Richmond Fed President Jeffery Lacker told CNBC on Friday that the Federal Reserve could raise rates before the end of the year. But will they stop buying up billions of dollars in government bonds? Not likely. Kind of a self-fulfilling prophecy, then, eh?

The Federal Reserve buys more government debt, which hammers dollar value, which causes inflation, which causes the Fed to raise rates.

CNBC reports that the bond markets could take the first hit if this happens.

Citing Rob Lutts, chief investment officer at Cabot Wealth Management, "For bond investors, they're in a huge bubble. The valuations in bonds are just as extreme today as in 2000 for tech. The valuations on short-term Treasuries and even the 10-year is not rational in this environment."

Here's my take on it... Nobody wants to be the bad guy. Nobody wants to tighten the monetary supply because GDP will suffer.

I'd argue that GDP growth isn't nearly as good as it seems with a falling dollar valuation.

Why not take the hit now, and get back to real growth?

They say desperate times call for desperate measures... Well, we've seen how desperate moves by the Federal Reserve have put us in an even tighter pinch than we really need to be. And these moves have effectively blinded the market to inflation concerns.

That's why these analysts' comments on the current bond market are so important. They're like the canary in the coal mine, and a popping of the bond market bubble could mean a huge decline in the stock market as well.

I mean, we're starting to see some irrational risk-taking again.

(Investing doesn't have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Jared Levy simplify the stock market for you with our easy-to-understand investment articles.)

The Wall Street Journal reported on Friday that subprime bonds are back, and that long-term investors are buying them up!

The ultra-safe, low interest rates the Federal Reserve has been issuing makes these investments look like a sweet deal, especially with the markets rallying. But if we understand that this rally is built with fake money, then those longer-term investments don't look so shiny...

And here's something interesting: The hedge funds are mopping up these loans. The bonds are yielding between 5% and 7%, and have doubled in price over the past two and a half years. They stand to make a hefty profit...

If everything works out well for our economy, and we keep growing, and we're able to cut back on the amount of government debt we (and the rest of the world) are buying, then I'll probably be eating my words.

But if not, then we'll be heading into a high inflation era, and you'll need to protect your portfolio.

The next three to six months will be really interesting. In mid-summer, the Federal Reserve will end its second round of quantitative easing, and we'll either be talking about QE3 or raising interest rates.

Now's the time to take a look at your portfolio. Are you holding government debt?

If so, you might want to balance that out a bit. According to Harry Browne's Permanent Portfolio strategy, you should be holding long-term bonds in times of deflation. But in times of inflation, which we are surely edging toward no matter what the Fed decides, you want to be holding gold.

Gold, or another hard asset denominated in dollars... That could be platinum or silver, or even oil or agricultural commodities.

Just look at this chart comparing the U.S. Dollar Index to gold over the past six months:

View larger chart

The inverse correlation is pretty obvious at the mid-February mark. It's even more pronounced in this chart comparing the U.S. Dollar Index to oil...

View larger chart

These two charts show just how powerful dollar-denominated hard assets can be when the value of the dollar falls.

It's investments like these that will help you protect your portfolio.

What specifically should you be buying? It depends on your investment experience.

The most direct way to take advantage of these types of dollar-hedging investments is through futures or options on futures. If you have experience with these types of investments, than you can also play the short-term waves in both the dollar-based commodities and the U.S. Dollar Index itself.

(And if you're super-savvy, you can take playing the U.S. Dollar Index to the next level by using futures and options in international currencies... Double the impact by choosing currencies from resource-rich countries, like we did in our collaboration with EverBank to create the Ultra Resource Basket CD.)

The next "purest" investments are commodity-based exchange-traded funds and notes (ETFs and ETNs). These ETFs and ETNs actually follow the price of their underlying commodity, be it oil, silver or gold. Many times, these ETFs and ETNs own the commodity itself, so the shares are backed in part by the specific commodity.

This is different than investing in ETFs that basket a number of commodity-based companies, like oil producers or gold miners.

These investments, along with investing in these companies individually, are another level away from the actual hedging power of dollar-based commodities. They have their worth, and can generate swift and significant gains, but they also have costs that factor into their share prices, like fuel and personnel.

But through any of these three hedging possibilities, you can find a bit of security for your portfolio.

Again, the next three to six months will be very important. Keep an ear to the ground when it comes to the Fed, but always look to their actions for their true beliefs about the economy.

And right now, the Fed has no plans to halt its QE2 debt-buying spree.

The Second Mortgage Meltdown Crisis

The mortgage crisis that's far from over, with a second wave of expected defaults on the way that could deepen the bottom of the U.S. recession.Abolish the private FED federal reserve.Since 1913 they have destroy the country.They have create wars,depressions and brought poverty to America,their final goal in total destructionIt is a crying shame, they used taxpayers money to bailed out the bankers and the investors in the tune of trillions of dollars, yet not one dime is given to bailed out the taxpayers allowing them to stay in their homes. What a evil country we live in, no wonder why cities are stocking up with military grade weapons to be use against the people when the people starts to turn on them.Get out of Dollars and the US Stock Market. There is going to be a run on the dollar soon as China becomes a net seller of treasuries instead of a net buyer like they are currently. They just announced a 600b bailout of their own, how do you think they will pay for it? Dump their 1Trillion plus in US treasuries. The game is up.

Stocks edge higher as oil hits new 30-month high

NEW YORK (AP) -- A light trading day on Wall Street closed with slight gains for major stock indexes.

With oil prices reaching a 30-month high of $108 a barrel, some investors are waiting for Alcoa Inc. to report its first quarter earnings next Monday, the unofficial start of the earnings season, before making any big moves. Traders are hoping to see how rising gas prices and other commodity costs are affecting corporate profits.

The Dow Jones industrial average rose 23.31 points, or 0.2 percent, to 12,400.03. The S&P 500 index gained less than a point to 1,332.87.

Materials companies gained 0.7 percent, the most of any of the 10 company groups that make up the S&P 500 index, as commodity prices increased. Futures contracts for corn, wheat, and sugar each rose more than 2 percent.

The Nasdaq composite lost less than a point to 2,789.19.

In company news, Pfizer, the world's largest drugmaker, said it would it sell its Capsugel unit to an affiliate of private equity firm Kohlberg Kravis Roberts for $2.4 billion in cash. Capsugel makes capsules for oral medicines and dietary supplements. Pfizer rose less than 1 percent.

Southwest Airlines Co. fell nearly 2 percent as the company continued to inspect its planes after the fuselage of one jet ripped open Friday, forcing it to make an emergency landing. Southwest grounded 79 planes after the incident and canceled about 700 flights over the weekend. The company said it expected to cancel an additional 70 flights on Monday.

Ford Motor Co. rose 2.6 percent. The company's sales rose 16 percent in March, in part because of the success of its new Explorer crossover vehicle. A Credit Suisse analyst upgraded the automaker, citing an improved balance sheet.

Vivus rose nearly 7 percent after the drug developer said patients taking its diet pill Qnexa over two years saw reductions in blood pressure in addition to significant weight loss.

Rising and falling shares were about even on the New York Stock Exchange. Consolidated volume came to 3.3 billion shares.