Saturday, April 30, 2011

Speculation vs. The Permanent Portfolio

I received a comment last week in response to my post about the possibility of a pullback in the near future.  A pullback seems less likely at the moment now after the Fed's meeting and Bernanke's press conference this past week.  However, I would still like to address the comment and add some more thoughts.

The question posed to me was, what would be good to have in a portfolio (presumably in the case of a pullback).  He says that his only current investments are in a 401k.

First, I should reiterate my opinion of 401k plans.  I don't think you should ever contribute more than what your company matches.  The only exception might be is if you are trying to get your income low enough for a certain tax deduction or credit beyond the amount being contributed to your 401k.  If all you have is a 401k, I really would encourage you to do everything you can to get some more liquid funds.  If you can save some additional money, you can split it between gold and cash as an emergency fund.  If this means doing a second job for a while or cutting your costs, I think it would be worth it.  Obviously every person's situation is unique, but I think my suggestion would apply well to most adults.

When I said that there may be a pullback, particularly in stocks and commodities, I was saying it as a speculation.  If all you have is a 401k, then you should really ignore most of my speculative advice, unless you have good fund choices and you can put a little more weighting into gold and commodities (for right now).  But a 401k is not meant for short-term trading and you may even get hit with fees for doing that.

I am a strong advocate of Harry Browne's permanent portfolio.  I think it is good to view this as a home base.  If you put 80% of your investments into the permanent portfolio, that will leave you with 20% for speculation.  Let's say your speculative investments do well.  For example, maybe you put half of it into silver and it has doubled in price.  If you are really uncertain about where things are headed from here and if you fear a pullback, maybe you could take the original amount you put into silver and shift that over to your permanent portfolio.

While the permanent portfolio can certainly go down, I consider it the best safety investment there is.  Cash by itself is not a safe investment because you are risking it being devalued by inflation.

Imagine playing a game where you have a home base for safety.  You can run away from the base and try to grab something, but you risk being hurt.  If you run out and get something, sometimes it is best to run right back to your safety base before trying to grab something else.  I look at grabbing things as your speculative investments.  I look at your home base as the permanent portfolio.

You should take as much time as you need at your safety base.  If you are unsure of what is going on around you, just stay put.  There will be other opportunities in the future.  You can wait for a long time before you are more certain that you can jump out and grab something without putting yourself at too much risk.

This is really a time to protect what you have.  There are a lot of risks right now and you should make sure you know them if you are speculating.  If you have absolutely no stomach for risk, then put all of your investments into a permanent portfolio setup.  You can sit back and enjoy the show while continuing to sleep at night.  If you want to take more risk, do it with a smaller amount of money.  You don't have to hit the lottery.  Just make sure to protect the vast majority of your assets at your home base. Keep them safe from this risky environment.

Thursday, April 28, 2011

Ron Paul for President in 2012

This blog focuses on money and investments from a libertarian perspective.  To determine our investments, we must study the economy.  To study the economy, we must study politics.  This is unfortunate, but it is reality.  Unfortunately, politics plays a huge role in our lives and in the economy because politicians wield so much power.  While I wish it weren't this way, we have to deal with the situation.

There are two things that will matter more than anything else in your long-term future when it comes to money.  The first thing is your own personal decision making and the actions you take.  The other thing is the state of liberty in which we live.  I suppose you could throw in luck as a third thing.

While it may seem we can't do much to determine the future of liberty as individuals, it is important to at least know where we are headed.

Ron Paul has announced that he will form an exploratory committee in seeking to run for president.  With the success of his last campaign, I can't imagine that there won't be an even bigger following, with even bigger donations this time around.  So it looks like there is a good chance that Ron Paul will be running for president.  While the general election is in late 2012 and most of the primaries will be in early 2012, this year will be the big year for him.

I don't think Ron Paul will become the Republican nominee.  Perhaps he is thinking that he can pull off what Reagan did in 1980 after not winning the nomination in 1976.  But I don't see the Republican Party nominating Ron Paul as their nominee.  Rand Paul would have a better chance.  The main reason is foreign policy.  There are too many pro-war people in the party.  Ron Paul's foreign policy stance of non-intervention does not appeal to these people.  I think Ron Paul will convert some people or at least get them to examine their position more closely, but I doubt it will be enough at this point.

For the cause of liberty, I strongly believe that the solution does not lie in politics.  The system is rigged in favor of big government.  There is no way that voting will solve our problems.  With that said, I was happy when Ron Paul ran for president 4 years ago and I am happy he is considering it again.  The reason is because it gives him a platform to reach out to so many people.  Look back at 2007 and 2008 and how many libertarians were created because of Ron Paul's campaign.

As libertarians, we couldn't ask for a better all-round person to get out our message.  He is honest, humble, and a great role model.  He does not come across as the typical politician.  Most importantly, he understands the issues of liberty clearly and he sticks by his principles.

It was a great move in 2007 for Ron Paul to run as a Republican.  It got him into the debates where he got incredible exposure.  Now that he is more well known and there is already a core group of supporters, I think he should run as a Libertarian (the party that is).  In a three-way race between Ron Paul, Obama, and the Republican nominee, I think Ron Paul could do some damage in attracting many independent voters and even some typical non-voters.  The best case scenario would be for him to just barely lose.  After all, why would we want him to win and inherit the total mess that there is right now?  I don't think he will run as a third party candidate and I completely respect his decision, but I think he should ditch the pro-war Republican Party, except when he is running for his congressional seat.

Ron Paul has released a new book and he has been getting a lot of media attention in the last few days.  With his message and the internet as a tool to spread it, the future for liberty is actually brighter than you may think.  The best thing you can do to advance liberty is to continue to educate yourself and to educate others.  We will only achieve more liberty and less government when more hearts and minds are changed.  This will not happen in a voting booth.

Wednesday, April 27, 2011

The Fed's Meeting and Bernanke's Press Conference

Today was a first.  Ben Bernanke became the first chairman of the Federal Reserve to hold a press conference directly following a Fed monetary policy decision.  Perhaps Bernanke is trying to make the Fed more transparent.  Perhaps more likely, Bernanke is feeling the heat from Ron Paul and his following of Fed critics.

The Fed announced that it was maintaining the federal funds rate low for an "extended period".  As Gary North has pointed out, the Fed isn't really maintaining this rate.  The federal funds rate is the rate at which banks borrow from each other for overnight loans to settle accounts.  With most of the new money created by the Fed going into excess reserves at banks, most banks have no need to borrow money overnight.  They have plenty of money of their own.

Bernanke also acknowledged that the Fed would continue with its QE2 program (money creation) through the end of June as planned.  While he hinted that it would not continue after that, he also hasn't ruled it out. Bernanke and the Fed are leaving their options open.  I really don't think they know what to do at this point.  Bernanke is acknowledging that some price inflation is present now and he is also acknowledging that the economy has weak spots.

The reason the Fed is acting so cautious with its words and actions (not that tripling the monetary base has been a cautious action) is that these people really don't know what to do.  The Fed is walking on a tightrope.  If the Fed keeps hiking up the monetary base, price inflation could quickly follow the monetary inflation.  With just today's announcement, the stock market, oil, gold, and silver all shot up.  Gas is already expensive and getting more so by the day and food is probably not far behind.  The Fed really is risking a run on the dollar.

On the other hand, the Fed could pull back and stop its money creation.  It could even withdraw some of its previous "stimulus" money.  If the Fed does this, it risks a hard and deep recession and this is with the official unemployment rate near 10% already.  We should actually hope that the Fed chooses this latter course as it will be much better for the long run.

I think the most likely scenario is that we will see a lot of ups and downs and we will eventually see recession and significant price inflation at the same time, much like we saw in the 1970's.  If we can get out of this like the 70's, we would be very lucky at this point.

For now, I expect heavy volatility and I expect the uptrend to remain for oil, gold, and silver.  I'm a little more unsure about the stock market.  These really are unique times that we live in.  Let us hope that we don't go to hyperinflation as that would truly be disastrous.  Let's hope that we can slowly phase out the Fed and start using money like gold or silver as determined by a free market.

Tuesday, April 26, 2011

Gas Prices and Price Gouging

Here we go again.  Last week, Obama said he would set up a task force to investigate potential manipulators in the oil and gas market.  Now Obama is calling for the repeal of tax breaks (in other words, increasing taxes) for the oil industry.

Obama is a typical leftist Democrat in that he likes to speak about helping the poor and about cracking down on the rich.  Yet, for someone who really understands economics and studies his policies, his actions are about the opposite.  If Obama were really serious about helping the little guy, he could take several steps to dramatically lower gas prices.

Obama could advocate a repeal of the federal gas tax.  He could advocate the repeal of regulations on the gas and oil industry.  He could advocate the selling of ANWR and other federal lands that contain oil (and this could have the added benefit of paying off some of the national debt).  He could also stop fighting wars in the Middle East and just allow Americans to buy oil from foreigners, instead of trying to occupy other countries for their oil

Most importantly, if Obama really wanted to help the little guy with lower gas prices, he could stop signing legislation that runs up the national debt, which in turn encourages the Fed to create more money.  The primary reason for high gas and oil prices is a monetary one.  The Fed has tripled the adjusted monetary base over the last couple of years and we should be surprised that oil is only around $112.

The reason that gas prices are so high is due solely to the Fed and the federal government.  Obama is trying to find a scapegoat for his failed policies by blaming oil companies and speculators.  He can talk about manipulators of the market, but the people he is talking about serve a legitimate function to the market process.  These people help the pricing process be more accurate and help direct supply and demand.  If speculators are right in driving up the price of oil, then it is signaling the market to find more supply and to cut back its use.

Meanwhile, the politicians of both major parties serve a function of distorting the market and making everything more expensive.  Then they talk about a problem that they created and try to pass the blame to anyone but themselves.  They are trying to take advantage of the ignorance of the general public.  I really do hope that most Americans wake up to this scam and realize that they are voting for the real enemy.

Monday, April 25, 2011

Silver Nears $50

Today, the price of silver nearly reached $50 per ounce.  This is right around its all-time nominal high reached in 1980.  The run in silver over 3 decades ago became a bubble.  It all collapsed with a series of events, including Volcker's Fed stopping the crazy money creation.  This also collapsed the gold price in dollars during that time.

After reaching a high of over $49 in early trading this morning, silver pulled back a little.  It is showing high volatility at this point, with huge gains made in just the last couple of months.  If you don't have any silver or silver positions and you are looking to enter the market, now is a risky time to do it.  Silver will probably go above $50 soon, perhaps this week, and it may have further to run in the near-term.  But it has gone up really far and fast and you should not be surprised to see a significant pullback.  Whether the pullback will start at $50, $60, or some other number, is hard to say.

Although the U.S. dollar is depreciating significantly due to the Fed's monetary inflation (now QE2), it is still wise to hold some cash on reserve.  It is always good to have some liquid money and you should have some on hand for pullbacks.  If silver ends up pulling back to, say, $40, then it will be a great opportunity to accumulate some.

On the other hand, if silver continues running, you might want to consider taking a little in the way of paper profits.  If you have a big position in silver or silver investments, then it might be time to consider a slight reduction in your position to lock in some paper gains.  50 dollars is a milestone and somewhat symbolic, so maybe that is the magic number to consider locking in some gains.

I still see the longer term trend being up for gold and silver.  Silver will be far more volatile.  You will get greater gains during the run-ups, like now.  You will also feel the pain more in the pullbacks with silver.  Until the Fed stops creating new money and the DC politicians are forced to address the debt, then precious metals will do well.  You should always hold a core position in your portfolio of gold and gold related investments.  I recommend 20 to 25%.  Silver is more speculative, but having 5% in silver may be a good idea.  With your speculative money in precious metals, remember to take some paper profits on the run-ups and to buy on the pullbacks.  We will continue to see fierce volatility due to the uncertainty of the dollar.

Saturday, April 23, 2011

How Much Wealth Do You Need To Be Wealthy?

This is a hard question to answer.  First, notice that the question is about wealth and not money.  The reason is because of the constant depreciation of money.  We live in a world of fiat currencies where central banks are continually creating money out of thin air.  So we could say that having one million dollars makes you wealthy, but that may not be true 10 years down the line.

Another similar question is how much wealth you need to retire.  Again, it is hard to measure with money.  It is not like you can just buy a bunch of 30 year bonds and live off the interest.  If the dollar is devalued, then your fixed interest payments may not be enough.  We also don't know what future interest rates will be and we can't accurately determine what rate of return we will get on our investments.

We could measure wealth in gold, but even that can be a problem.  Because of the instability of fiat currencies, gold fluctuates wildly.  You can have bubbles in gold, at least in terms of dollars and other fiat currencies.  The price of gold went down in the 1980's while prices went up.  The price of gold has gone up 5 times of what it was 10 years ago, but consumer prices have not risen that much during that period.

Gary North has written an article on debt.  The particular part of this article that I want to point out is his comments on housing.  He discusses someone who needs $5,000 a month before taxes in order to retire.  He says, "I tell them that they need about six 3-bedroom, 2-bath houses that generate $1,000 a month net income before income taxes."

I think Gary North has hit the nail on the head with this one.  It really is a good measure of wealth and a good measure of what you need to retire.  If you own real estate that can be rented out, then you will be paid in dollars (or whatever money your country uses).  Since you use dollars to buy consumer goods, this is a good measure.  But it also solves the problem of inflation.  As the dollar depreciates, rents will go up.  Some of your other expenses like property taxes and maintenance may go up as well, but the increase in rent should far exceed this.

I am not saying that you need to buy real estate in order to retire (although I'm not discouraging it either).  What I am saying is that it is a good measure of wealth and you can use it as a yard stick.  If owning six houses, with no mortgage, will net you $1,000 a month and that is enough to live on, then you can calculate how much money you need right now.  If such a house sells for $150,000 where you live, then you need approximately $900,000 (6 x 150,000).  I would round it off to one million just to be safe.

But you have to make sure you invest it wisely to make it last, especially with inflation.  To protect your wealth, I have two recommendations: real estate as mentioned above and Harry Browne's permanent portfolio plan.  Both of these plans help protect you against a falling dollar.

Thursday, April 21, 2011

Will There Be a Pullback in Gold?

Gold has hit an all-time nominal high of $1,500 per ounce.  Silver has hit $45 per ounce, just short of its all-time bubble high of about $50.  For those who have been paying attention, it does not come as a surprise.  The Fed has tripled the adjusted monetary base in the last few years and the federal government has been adding about $1.5 trillion in new debt each year for the last couple of years.  The worst thing (and the best thing for gold) is that there is no sign of this madness stopping.

Yesterday, there was a piece on LRC featuring an interview with David Galland.  Galland is part of Doug Casey's group at Casey Research.  If you haven't read this interview, it is definitely insightful.  To sum it up, Galland is warning that there could be a big policy shift in the short term.  While his long-term outlook has not changed (more inflation and higher commodity prices), he thinks there could be a pullback in the not-so-distant future.

While I'm not making any predictions, I think his analysis is reasonably sound and I think the scenario he outlines is not only possible, but reasonably likely.  Galland is saying that there will be no QE3 this year.  He is expecting an announcement, perhaps following the FOMC meeting at the end of April, that the Fed will stop buying government debt.  The Fed will either cut QE2 short or just let it play out but not buy any more after that.  Just such an announcement could cause a big pullback in the stock market.  It would also likely strengthen the dollar.  In turn, gold and silver could see a sharp pullback.

I would give this scenario at least a 50/50 chance of happening right now.  I agree with his assessment that if the Fed does announce that it will stop buying, then we will see a significant pullback.  Unfortunately, it is hard to predict what the Fed will do.  I have already been surprised at just how much the monetary base has increased, so I shouldn't be shocked if the Fed does do something as stupid as QE3.

Regardless of what happens, Galland believes that the long-term trend will hold.  If the Fed does hold off on QE3, then it will just come later after the economy goes through another round of beatings.  If Galland's short-term prediction doesn't hold and the Fed starts QE3 right after QE2, then expect gold, silver, and oil to go to the moon faster than even goldbugs could have imagined.

Wednesday, April 20, 2011

Is the Stock Market Up Because of QE2?

There are a lot of reasons to be bearish against the stock market right now.  Unemployment is still near 10% (according to government statistics), banks are holding back when it comes to lending, and there is an overall anti-risk and anti-investment mentality right now in the business world, especially because of excessive government.

There is one reason for the stock market to go up.  That reason is the Federal Reserve creating new money out of thin air.  So to answer the question in the title of this post, yes, the stock market is up because of QE2, along with QE1 before it.

I have argued before that an increase in the overall stock market is due to monetary inflation.  While the stock market does not necessarily track the money supply in the short term or even the intermediate term, there is a strong correlation in the long term.  If the Fed kept a completely stable money supply where it did not increase it or decrease it at all over a long period of time, then the stock market would trade in a relatively narrow range.  If there is no new money to bid up prices, then the prices won't be bid up.

For those who understand Austrian economics, or for that matter Chicago school economics, you are aware that the overall price level changes because of changes in the money supply.  If there were no changes in the money supply, prices, in general, would not go up in a free market.  In fact, in a free market, prices would actually fall due to the increases in production and technology.  If you accept this fact for consumer prices, then it should not be much of a stretch to apply the same thinking to asset prices.  So while certain stocks may go up or down in price, the overall stock market would stay relatively flat if there were no changes in the money supply over a long period of time.

This is why you should not use the stock market as a predictor of the overall economy.  The stock market has been going up big time for the last couple of years.  But this is following the initial bailouts and a doubling of the monetary base.  Now we have QE2 (more money creation) that is supposed to last 8 months (until June).

This is why I have been hesitant to recommend large short positions.  I certainly think there could be some severe pullbacks in the stock market and a small short position might turn out to be a good speculation right now if you get in and out rather quickly.  But overall, it is hard to fight the Fed on this one.  The monetary base continues to go up and this new money is going to go somewhere.  Things like gold, oil, silver, and food are going up, but you can add the stock market to that too.

This is why we should not judge the Japanese economy too harshly based on its stock market.  It has been down or flat for the last two decades, but you can partially chalk that up to the fact that its growth in the money supply has been much tamer than elsewhere.

There are no guarantees that the U.S. stock market will keep going up, but if the Fed keeps creating new money out of thin air, it is hard to bet against it.

Tuesday, April 19, 2011

S&P Cuts Outlook on America's AAA Debt

Standard & Poor's cut its outlook on U.S. government debt.  It is keeping its AAA rating for now, but the rating is going from stable to negative.  The stock market reacted to this news with a sharp decline.

Next thing you know, there will be a report that politicians sometimes act in a corrupt way and people will be shocked by the news.  If you detected some sarcasm, it is because this news is not news at all.  The only thing newsworthy about it is that some in the establishment are starting to at least acknowledge that there may be a problem (and yes, S&P is part of the establishment).

If S&P were really honest, the U.S. would have lost its AAA status many years ago.  There is no possible way that the current debt will be paid off, unless it is done through massive inflation (which is, in a sense, a default of its own).

I suppose that it's a good thing that more people are realizing that there is a major problem that has been created by DC.  The current course is unsustainable and something is going to change.  A lot of people are going to be unhappy, whether it is people having more taken from them by the government or people losing out on their free lunches.

The politicians in DC will continue to run up the debt until one of two things happen.  Either the law of economics will eventually force them to cut because the Fed can't create any more new money without risking hyperinflation, or Americans will put an end to it.  For Americans to put an end to the reckless spending, we will need to see more than a few tea party people elected to Congress.

If Americans really desperately wanted lower spending right now, then it would happen.  The problem is that the opposition to big government is not strong enough right now.  Even if it is an even split, guess which way the politicians will come down.  Americans need to stop worrying about voting the "right" people into office.  Instead, they need to educate themselves and help educate others.  Americans need to stop depending on government and expressly withdraw their consent.  If half of Americans turned into minarchists and/or anarcho-capitalists overnight, then the federal government would just about dissolve in a short period of time just based on public opinion.  This would hold true for any country.

Sunday, April 17, 2011

Why Gold is a Good Hedge Against Inflation

Last week, I received a comment about gold/ commodities being an accurate gauge of inflation.  The beginning of the comment was as follows:

"I'm a novice on this, so forgive me if I'm off-base, but your statement that created money goes into hotspots (and the idea of bubbles) seems to conflict with my understanding of commodities.  I thought that commodities were an accurate gauge of inflation, so gold (and oil) going up, would indicate a devalued dollar, not an artificially created 'bubble' in oil (or gold)."

Let me attempt to clear this up.  While gold has a certain correlation with inflation, it is not a direct correlation in the short-term.  If you want an investment as a "hedge" against something, then you want it to react strongly.  For example, TIPS (bonds that adjust for price inflation) are not a good hedge against inflation.  Even if you put half of your portfolio into TIPS and price inflation started raging, then only that one half of your portfolio would stay even with price inflation.  The other half would be vulnerable.  If you want to find a good hedge against severe price inflation, then you need to find something that will go up at a faster rate than the rate of price inflation (in the short-term).

This is where gold comes in.  Just like real estate, gold will have a strong correlation with inflation over long periods of time.  But over shorter time frames, there is not necessarily a strong correlation.  Gold was a terrible investment from 1981 until 2001 and yet there was positive price inflation in every year, although it was relatively low when you compare it to the 1970's.

When you look at the 1970's and you even account that it was during a time when it became legal again for Americans to own gold, you can see that the price of gold went up far in excess of the inflation rate.  If you had put all of your money into gold when it became legal and you held it until 1980 before it crashed, you would have made a profit in real terms.  Adjusted for inflation, you still would have been way ahead.

This is why gold is such a good inflation hedge.  Gold tends to rise and rise dramatically during times of uncertainty and times of high inflation.  It is also a canary in the coal mine when it comes to future price inflation.  When people are worried that the Fed will create a lot of new money out of thin air in the near future, they turn to gold to protect their savings.  In times of high inflation (and we do have high monetary inflation right now), gold will do especially well.  If you have just a quarter of your investments in gold, then it can make up the difference for your other investments that aren't keeping up with inflation.

As for bubbles, I don't think gold is currently in a bubble.  There is no mania yet.  The only mania I see is trying to get people to sell their scrap gold for cash.  In a mania, you would see people trying to come up with cash to buy gold.  While I do think that gold can be a "hotspot" for newly created money, it does not mean that the price of gold is about to come crashing down.  There are logical reasons why gold is going up significantly right now.  People are afraid of the future and afraid of fiat currencies (particularly the U.S. dollar).

In conclusion, during times of unusually high inflation, you should expect gold to go up at a rate that is even greater than the inflation rate.

Saturday, April 16, 2011

Review of Atlas Shrugged Part I

I had the enjoyment last night of seeing the movie Atlas Shrugged.  It was the first part of three.  I had heard a mix of reviews of the movie, so I didn't have my hopes real high.

I read the book almost 11 years ago and have not read it from start to finish since then.  Like many people, it was a highly influential book for me.  I don't think the book is very realistic.  It paints a world of black and white.  It seems that most of the businessmen are either good or evil and there isn't much in between.  The reality of the world we live in is that there are smart and productive businessmen who aren't necessarily strong advocates of liberty.  Also, while businessmen and entrepreneurs are vital to our economy, we should not forget that the middle class is just as important and the middle class are often better advocates of liberty.

Overall, I enjoyed the movie.  It is hard to do the book justice, but considering the time and money limits of the film, I thought it was reasonably well done.  The actress who played Dagny Taggart was just how I imagined she would be when reading the book.

Unlike the book, the movie takes place in the year 2016.  They mention headlines such as the Dow Jones being below 4,000.  Railroad use for travel and shipping is popular once again.  Other than the time period, the movie seemed to stay close to the script of the book.  It is hard to say, but for someone seeing the movie without having read the book, it seems that there is less of a mystery, although you still don't know where all of the productive people are disappearing to.

For anyone who has not read the book or seen the movie, I really would recommend reading the book first if that is possible for you.  I am not a big fan of Ayn Rand's writing style, but the story itself is incredible once you get into it.  Of course, people who are not sympathetic to liberty will not enjoy it, unless it happens to convert them.  The book is over 1,000 pages long and it is not an easy read, but it is certainly worth it if you can find the time.

I am not sure whether Ayn Rand would have been happy with the movie or not.  Regardless, it does draw attention to the book and that is a good thing.  I am not an Objectivist and I have my disagreements with Ayn Rand and her followers.  But she is an important part of the libertarian movement and Atlas Shrugged is one of the best libertarian books ever written.  If you have already read the book, watch the movie when you have an opportunity.  I hope you enjoy it as much as I did.

Thursday, April 14, 2011

Paul Ryan and His Roadmap

Yesterday, I severely criticized Obama and his ridiculous "plan" to "cut" the future deficits.  Today, it is time to pick on the Republicans, so let's have a brief discussion about Paul Ryan, a congressman from Wisconsin.

Paul Ryan has a so-called roadmap.  But just like with Obama's plan, it doesn't actually cut the size of government.  All it does is reduce the rate at which government is increasing.  It takes the already proposed budgets and reduces them, but the government will continue to get bigger.

If Paul Ryan wants to reduce spending, don't give me a 10 year plan (just as Obama gave a 12 year plan).  Instead, reduce government spending right now.  The current budget does nothing to reduce government spending.  It increases spending.  Let's stop with these future plans and do it now.

I have one other suggestion for Paul Ryan.  Instead of giving us your roadmap, how about you start repealing all of the hideous things that you helped pass while Bush was president.  Paul Ryan supported TARP (the bailouts), he supported the Medicare prescription drug plan (socialized medicine), and he supported "No Child Left Behind" (the centralization of government education).  These are just a few of the big things that he did to support big government.

If Paul Ryan is serious, he should repudiate all of these horrible votes from his past.  But he won't, because he is a politician and he isn't serious about cutting government.  He is a fraud.

Don't believe any of these Republicans in DC.  The only person who is at all serious about cutting government is Ron Paul.  His son, Rand Paul, comes in a distant second.  There might be a few other tea party people in the House who are half-decent.  After that, the Republican politicians are a bunch of frauds.

Again, the national debt will continue to grow no matter which party is in power.  It will take a severe fiscal crisis to stop the spending.  It will be done the hard way.

Wednesday, April 13, 2011

Obama's Plan to Cut $4 Trillion from the Deficit

Obama gave a speech today laying out his plan to cut $4 trillion from the deficit.  First, let's distinguish between the debt and the deficit.  The debt is the total amount that the federal government owes.  It is currently over $14 trillion.  This is not getting cut.  The deficit is the yearly amount that is added to the total debt.  This year it is projected to be over $1.5 trillion.

When Obama says he plans to reduce the deficit, this means that he plans to reduce the rate at which the national debt is increasing.  But it will still be increasing.  Imagine if you have $50,000 in credit card debt and you keep adding another $5,000 to this debt each year.  Then you say, "I have a plan to reduce my deficit by $2,500.  I will cut my deficit in half."  The problem is, you will still be adding $2,500 a year to the credit card debt that already exists.  You will be doing nothing to pay it down and you will keep spending beyond your means.  What kind of a plan is this?

This so-called $4 trillion is over 12 years (long after Obama will be out of office).  That is just over $300 million a year when deficits are projected to be over $1 trillion per year.  Seriously, this has to be some kind of a joke.  So Obama's plan consists of continuing to add over $700 million to the national debt every single year and we are supposed to cheer this?

It gets even worse when you look at the details that we have so far.  Of the $4 trillion in so-called cuts (which they really aren't), one trillion is coming from tax increases.  This alone is a farce because higher tax rates don't necessarily mean the government will collect more money.  Another one trillion will supposedly come from lower interest payments on the national debt.  I didn't know that Obama had the ability to predict lower interest rates in the future.  He should really get into trading futures if he is that brilliant.

The remaining 2 trillion will be from reductions in spending.  This really means reductions in what is projected for the future.  No real spending cuts will actually take place.  Even part of this consists of $480 billion that will be "saved" from Medicare and Medicaid.  But I thought that was already part of Obama's healthcare plan.  If saving money from Medicare is that easy without affecting healthcare, why don't they do it now?  You're telling me that the government was just going to throw away $480 billion that wasn't really helping anyone important with healthcare expenses?

This guy is a real joke.  He must think that the American people are really stupid.  Let's see if he is right. I hope the majority of people see right through this garbage.  This just tells you how out of control the politicians are in Washington DC.  The national debt will only stop growing when the Fed refuses to buy any more government debt or the people stop electing these clowns.

Tomorrow I will discuss the phony plan laid out by Paul Ryan.

Tuesday, April 12, 2011

The National Debt Ceiling Approaches

While still trying to get through this phony show on the budget, Congress and the president will soon be arguing about the national debt.  Obama says that he regrets his vote against raising the national debt limit while he was a senator.  Of course he does, because it makes him look like a hypocrite.  He voted against it while Bush was president, but now he is president, so things change.

You can view the national debt in several places.  You can try here or here.  They will vary a little bit as they are estimates.  The current debt ceiling is just under $14.3 trillion.  It is projected that it will be hit sometime in May.

If the government doesn't raise the debt limit before the ceiling is reached, then maybe we really will have a government shutdown.  It would be even better if we saw some kind of a default, although that is not likely.  In fact, it is unlikely that Congress will fail to raise the debt ceiling.  Despite the bickering between the two major parties, they really are in cahoots with each other.  The Republicans will pretend like they want cuts.  Obama and some of the Democrats will say that children and elderly people will be starving in the streets.  The two sides will come to an agreement, just in time to save the world.

The two parties even count votes.  If there is a Republican who was elected on a tea party platform, he may be permitted to vote against raising the debt limit.  If the vote is too close, the establishment may require that he vote in favor of it.  If that happens, he will say that this is just a start and that they won because of the "cuts" in government spending that were achieved.

For any politician who really wants a balanced budget, then they should simply vote against raising the debt limit.  It really is that simple.  We hear that it is just not possible, but that's not true.  It's just not politically possible for most of these people (Ron Paul is usually the lone exception).

If the government brought all troops home, ended the Department of Education, ended all farm subsidies, ended all foreign aid, ended the Department of Energy, ended the FDA, and ended all corporate welfare, then the budget would close to balanced.  This is just a beginning and we haven't even touched Medicare and Social Security yet.  But, of course, this is impossible in the eyes of the typical politician and even many Americans.  This is why it continues.

These continual votes on raising the debt ceiling are a joke.  It really isn't a debt ceiling if it keeps getting raised.  The true debt limit is the limit imposed by the U.S. dollar.  The Fed will keep buying debt until it faces the threat of massive inflation or hyperinflation.  At that point, we will hope that the Fed quits buying government debt in order to save the dollar.  Then it won't matter what the debt limit is.  Congress will not be able to deficit spend any longer.  They will be forced to cut back and it will be much more painful then.

Monday, April 11, 2011

Contributing to Your 401k Plan

I received a question recently regarding investments beyond a 401k.  I think this advice might be helpful to others, so I will respond with a post.  The question was as follows:


"If I'm currently putting say 6% into a company-sponsored 401k (which is the point at which they'll match 50%) and am not making any other investments, what would be the best next step? I'm thinking of maxing out my 401k contribution, but I've also read recommendations that I should *first* max out a Roth IRA, and *then* (if I still have available money), bump up my 401k contribution. Both of these (401k and Roth IRA) have tax advantages, but if you feel that other types of investments (e.g., Gold) would be even more important before opening a Roth IRA or bumping up my 401k, I'd appreciate that info."

My opinion on this matter is that you should only contribute to a 401k up to the amount of your employer's match.  If you are contributing up to the match and you have extra money to invest, you absolutely should not contribute more to your 401k plan.  The reason is because of all of the uncertainties and inflexibilities that come with a 401k plan.  You are subject to the decisions of your employer's plan along with the government.

First, you have no idea what the tax rates will be when your retire.  This would be a reason to favor a Roth IRA or Roth 401k over a traditional IRA or 401k.  Second, you are locking up your money until the age of 59 and a half.  You cannot withdraw your money before then, unless you pay taxes on it along with a hefty penalty.  And this is only if your employer's plan will even let you withdraw any money.

A third reason against further investing in a 401k plan is that the government could change the rules at any time.  The government could change the age for withdrawal.  It could even make tax rates higher for retirement plan income.  I am not saying that this will happen, but that it can happen.  Could you not imagine some politician saying that it is unfair that some retirees have big 401k balances while others have nothing saved?  Could you not imagine the same politician saying that we need to tax the big retirement plans to even things out?

An even bigger threat is that the government could try to confiscate retirement plans.  It would not happen all at once, as this would cause a revolt.  Instead, imagine a scenario where the stock market crashes and the government steps in with special government bonds where you will get a "guaranteed" safe investment with a "guaranteed" rate of return.  These special bonds would be optional at first.  Then the politicians would slowly take steps to move them from optional to mandatory.  While I don't expect this to happen, anything is possible.

So what should you invest in?  First, I am assuming that you have paid off all credit card and other high interest debt.  Second, you should put a little money aside as a rainy day fund.  This would just go into an FDIC insured bank account.

Next, I would recommend investing in some gold and gold related investments.  This is especially important because it is hard to invest in gold related investments in a 401k plan.  In addition, we are in a very shaky environment right now where anything can happen.  Look at gold investments as an insurance policy as much as an investment.

After all of that is taken care of, you could look at a Roth IRA.  While there is still the problem of unpredictability from the government, there are advantages over a 401k plan.  With the Roth, you pay your taxes now and don't have to worry about the tax rates when you retire (assuming the government doesn't change the rules).  Also, another great benefit is that you can withdraw your principal investment (not gains) from your Roth plan and you will not pay a penalty.  This gives you more flexibility in case you need money for something important.

I am still a big advocate of Harry Browne's permanent portfolio plan as laid out in his book Fail Safe Investing.  If you are looking for a mutual fund to imitate this, then you can buy PRPFX.  You can do this in a Roth IRA or a regular trading account.  I hope this information helps.

Saturday, April 9, 2011

Oil at $113

The price of crude oil passed $113 per barrel today.  It has been climbing steadily for the last few months.  If you are looking for a good mutual fund with energy stocks, there is an energy fund by Fidelity with the symbol FSESX.  I have no opinion in trying to time it.  You really should have bought this fund a couple of years ago, but if you think oil is going higher still, then this may be a good mutual fund to own.  If you want to own it, just buy it and don't try to time the market.  If you fear a pull back in the short-term, then dollar cost average your way into it, but don't wait.

The price of oil had already been climbing, but it really started to take off when the protests in the Middle East and Africa began.  When Libya started to erupt, then the price really took off and has continued.  It is easy to blame the situation in Libya for our current oil price, but it really misses the big picture.

The Fed's program of QE2 (money creation) is the elephant in the living room that many don't want to talk about.  The Federal Reserve has almost tripled the monetary base since 2008.  Although most of this new money has gone into excess reserves with the banks, the new money is still having an effect on prices.  We are starting to see that now.

When new money is created, it is not evenly distributed throughout the economy all at once.  It can go to certain hot spots.  It causes bubble (and later busts).  Right now, it seems to be going into oil, precious metals, and other commodities.  It is also going into stocks to a certain degree.

When something happens in Libya or there are reports of things happening in other oil producing countries, the hot money starts bidding up the price of oil.  It is almost as if the market is looking for a reason to bid up certain prices.

So although the supply and demand (and the perceived supply and demand in the future) of oil affect its price, the supply and demand for money also affect its price.  The supply of money is going up.  Expect prices to go up.  Oil and precious metals are going higher right now.  Food prices will probably not be too far behind.  Be prepared for higher prices.

Thursday, April 7, 2011

Adjusted Monetary Base as of April 7, 2011

The adjusted monetary base is on fire.  You can view it here:
http://research.stlouisfed.org/publications/usfd/page3.pdf

Sometimes it is important to take a step back and get some context.  The longer term chart is here:
http://research.stlouisfed.org/fred2/series/BASE

The money supply has approximately tripled in the last 2 and a half years.  Nothing like this has ever happened in modern day America.  It really is unprecedented.  Oftentimes, I think libertarians get carried away with their predictions of doom and gloom.  People that believe strongly in the free market do not give enough credit to the free market's ability to overcome government obstacles.  But this explosion in the money supply really is something to worry about.

Quantitative easing is the new term that refers to money creation.  QE1 happened after the fall of 2008.  We are now in QE2 mode which is supposed to continue until June.  You will hear some say that the economy is bad because banks aren't lending.  What these people don't realize is that the lack of bank lending is what is keeping this economy from completely falling apart.  If the banks were lending out all of this new money being created, we would be facing the possibility of hyperinflation.

I am not sure if the Federal Reserve has any idea as to what it is doing.  This crazy money creation is causing great damage that we will see in the future.  It is misallocating resources on a grand scale.  It is preventing previous malinvestment from correcting.  It is setting the stage for what could be the Greatest Depression, even worse than what we saw in the 1930's.  I hope I am wrong and that the Fed slowly starts to pull this new money out of the system.  I hope we go through a recession like we did in the early 1980's.  Bernanke and the Fed are playing with fire right now.

Expect for price inflation to slowly pick up throughout the year.  I don't expect QE3 any time soon, but you never can tell with the morons that are running the Fed.  If you haven't already done so, prepare yourself for price inflation like we saw in the 1970's or worse.  Buy essentials that you need.  Buy extra and don't wait.  You obviously can't buy extra gasoline and most food now, but there is a lot you can stock up on.

For your investments, you should have at least 25% of your portfolio in investments that do well during times of high inflation.  This is the minimum.  You should invest in things like gold and gold related investments, silver and silver related investments, oil stocks, oil mutual funds, oil ETFs, other commodities, etc.  You should prepare for interest rates to go much higher, but I wouldn't necessarily speculate on it right now.

I have a lot of faith in the free market, but the Fed and the government are doing too much damage right now for us not to feel some major pain in the near future.  Prepare yourself and don't wait.

Wednesday, April 6, 2011

Why the Debt Matters

Since the national debt is in the national news, now is a good time to review it.  The national debt is over $14 trillion and growing.  It is slightly less than the GDP.  The debt-to-GDP ratio will be over 100% soon enough.  So what are the consequences of this?

We hear so often that we are putting a burden on our children and grandchildren because they will have to pay this back.  There is an element of truth to this, but let's examine it closer.  Our children and grandchildren technically don't have to pay back anything.  They can stiff all of the bondholders.  If there are enough people who understand the issue and take a stand, then it will be the bondholders that will suffer.  That will include foreign governments like China and Japan, foreign investors, American investors, and I suppose the Federal Reserve.

The national debt has real consequences and they are happening right now.  When the government spends money, it is misallocating resources.  It is draining resources from the free market economy.  There is less capital investment on the so-called private side.  It is wasting resources.  This diminishes our standard of living.  By not completely reforming our system - that is, by not withdrawing our consent to be governed - Americans are hurting themselves by allowing this debt to continue to grow.  It really comes down to Bastiat's philosophy of what makes a good economist.  We can clearly see the so-called benefits that the government hands out.  What we don't see is all of the products and services that would have been invented, improved, and more affordable.

The reason that the national debt is hurting our children, grandchildren, and future generations isn't because they will have to pay it back.  The reason is because of the lack of capital investment that is taking place because of the national debt and out-of-control government spending.  The government is misallocating resources on a massive scale.  It means that there will be less to consume in the future.  It means that there won't be as much growth in technology and production.  With less capital investment, the standard of living will not be as high as it should be for future generations.

The national debt will probably never be paid off.  It certainly won't be paid off in dollars that are worth as much as today.  The national debt has very real consequences though in making our standard of living far lower than what it should be.

Tuesday, April 5, 2011

Will There Be a Government Shutdown?

There probably won't be a government shutdown (unfortunately).  If there is, it probably won't last long.  If there is, it doesn't mean that all troops will be coming home and that Social Security checks will stop.  It means that some government employees won't be reporting for work for a short while.

This whole debate is for show.  The Republicans have to show a little bit of allegiance to the tea party people and the Republican politicians need to pretend that they care about cutting spending and reducing government.

The Republicans originally proposed about $100 billion in cuts.  Much of this turned out to be decreases in proposed spending.  The real cuts amounted to about $62 billion.  This didn't pass the Senate.  Now they are talking about cutting $33 billion below current spending.

This whole thing is a joke.  This is a debate about nothing.  The national debt is over $14 trillion.  The annual deficit is over $1.5 trillion.  The DC politicians are arguing over amounts that total less than 1% of the total federal budget.

This whole thing is symbolic.  What it is really symbolic of is the coming fiscal collapse because the spending in DC is out of control.  The Fed will continue to print money to fund the bad habit.  We will have to wait for high price inflation and higher interest rates before the Fed will consider putting on the monetary brakes.

We will see fiscal discipline forced on the DC politicians, much like we are seeing in many states.  The DC politicians can keep their game going longer because of the central bank.  When the dollar is on the verge of collapse and the Fed has to stop creating new money, then we will finally get to see the show.  Then we might see a true government shutdown where the troops really do come home.  If it is really bad, we might even see Social Security checks stop.

Monday, April 4, 2011

The Permanent Portfolio and Its Inflation Bias

I am a strong advocate of the permanent portfolio, as recommended by Harry Browne in his little book Fail Safe Investing.  For those not familiar, I recommend reading it and implementing it.  To give a very brief summary of the permanent portfolio, it is a portfolio in which you divide up your investments as follows:

25% stocks
25% long-term government bonds
25% gold
25% cash (or cash equivalents)

The idea of this portfolio is asset protection with some growth.  It is highly diversified so that it will be protected (and possibly grow) in any economic environment.  There are variations of the portfolio such as the permanent portfolio mutual fund (symbol: PRPFX), but the idea is still the same.  The portfolio has done remarkably well over time with very few down years and significant growth.

One thing about the permanent portfolio (including the mutual fund) is that it has an inflationary bias.  In other words, the portfolio performs much stronger in a highly inflationary environment.  This is because of the 25% weighting in gold.  The mutual fund is similar, with a small portion in silver.  This is much higher than the typical investment advisor would recommend.  It is surprising when you get an investment advisor recommending as much as 10% in gold  or gold related investments.

This inflationary bias with the permanent portfolio is just as it should be.  If you are in a period of deflation and falling prices, you don't need your portfolio to do really well.  You just need it to stay the same and your purchasing power would be increasing due to falling prices.  But in an inflationary environment with rising prices, you want your portfolio to be going up more than the price inflation rate.

If prices are going up at 10% per year, then you want your portfolio returning 15 or 20%.  If prices are flat, then a return of 5% on your investments is reasonable.  When looking at it this way, the permanent portfolio is even stronger than just looking at the charts (which is impressive anyway).  The returns, when factoring in price inflation, are even more steady for the permanent portfolio.

I recommend having your core holdings in something that is set up similar to the permanent portfolio.  I am not against speculating, but I think that should be done with "play money".  There is nothing that is guaranteed in this world, but the permanent portfolio is the closest thing to safety as you will find and you may even get some decent returns with it.

Saturday, April 2, 2011

The Federal Reserve Releases Documents

After a lawsuit was filed by Bloomberg, a case that went all the way to the Supreme Court, the Federal Reserve has released over 29,000 pages of documents which gives us some detail of the bailouts that took place 2 and a half years ago.  Although much of it will be called lending from the discount window, it is still a bailout nonetheless.    If a bank, or any firm, has to get a loan from the Fed's discount window, it is being subsidized.  No private party would make a loan under the same conditions.

The documents show that some of the biggest "borrowers" were not even American firms.  The most ironic of them all shows that a company which is partly owned by the Libyan central bank (part of the Libyan government) borrowed billions of dollars.  This pretty much fits in line with U.S. foreign policy: "we were for them before we were against them".

If you are not outraged by this, then you are either a long-time libertarian who has become numb to what is happening or else you are just not with it at all.  The American people were overwhelmingly against the bailouts that took place in the fall of 2008.  Despite the outrage, Congress, along with Bush, passed the bailouts, telling us that the whole system would have collapsed otherwise.

This was hard enough to fathom at the time, but now we know the Fed was also bailing out foreign banks and, apparently, foreign governments.  Where does this end?  I suppose the answer to that is with a collapsing dollar.

This whole episode is another black eye for the Fed and the federal government in general.  The American people are starting to figure out that these clowns in DC are not on their side.  They do everything for themselves.

Since Ron Paul's campaign in 2007, the Fed is being questioned more and more.  The internet has played a huge role in spreading all of the information and disinformation.  Although the numbers are still small, more people are becoming educated about monetary policy and the central bank.  More people understand that the Fed simply creates money out of thin air, which then makes the dollars we have worth less.

While this release of documents should outrage the average American, I think it is a good thing overall because it alerts people as to who the enemy is.  When high price inflation becomes more apparent, I want people to know who the culprit is.  I want people to blame the Fed, just as they should.  The Fed has gotten away with things for almost 100 years and finally, the tide is starting to turn.