Make the Trend your Friend

"Whenever you find yourself on the side of the majority, it is time to pause and reflect"
Mark Twain

Welcome to The Golden Sense! Some say that the road to hell is paved with good intentions. I happen to fully agree with that statement. Yet on that hot steamy road to hell I am sure there is a good opportunity to sell sunscreen and tank tops. There is no doubt a market for these products when people are headed to such a hot place. The point is that no matter where the road is headed, it is important to take advantage of the opportunities that the road offers.

There are trends and tendencies in all aspects of the world today. By identifying a public inclination toward a particular behavior or a general direction in which a financial market is developing you can take steps to make profits or position yourself for potential windfalls. There are short, medium and long term trends and these trends are a product of mass human behavior. When I use the phrase short term, I am refereeing to a time frame shorter than one year while medium term is 2-5 years and long term is 6 years and beyond. Forecasting human behavior is never easy but by understanding behavioral tendencies we can take advantage of opportunity when it appears.

In the short term there are technical price trends in the financial market. The price action of the stock market has fallen into a distinct upward trend. Simply put, stocks are bullish. As of the fall 2013 stocks are hitting their highs and the general public is investing heavily in stocks. The stock market is generally overpriced and over loved at this moment. The average guys is piling in and guaranteeing the market in the short term will move higher. Every bull market is different, and this one's uniqueness stands out as a result of unprecedented global monetary easing which has driven interest rates to all-time lows. The reason the stock market is so bullish is because it is currently the only game in town. Having money in bonds earns you almost nothing so people put their money into dividend paying stocks where they hope to get capital gains and at worse a quarterly dividend.  Some call it the speculative third phase of a bull market where valuations get thrown out the window for the obsession of making a profit. During these periods market prices typically go parabolic where prices go to dizzying heights. This is when the big Wall Street institutions gradually sell out and step to the side lines. In this situation there is still opportunity. First and foremost, you have an opportunity to take caution in regard to this trend. You wouldn't want to be fully invested but in the short run you should be somewhat invested and take advantage of the ascending price. Being invested can make you some quick profits, but just be careful because nothing goes up forever. Eventually gravity takes over and prices will come back down to reality.

In the medium to long term we have the financial price fixing imposed by Federal Reserve. The Federal Reserve currently buys $85 billion worth of mortgage backed securities and Treasuries each month. By doing this the Federal Reserve is keeping the price of bonds high and interest rates low. This trend will continue until it can't.
 
Chris Martenson of Peak Prosperity explains the Federal Reserve's actions:

"If you understand our monetary system, you know that by its very design, it must grow. If it's growing – and exponentially, at that – then it's relatively happy.  When it stops growing or even goes into reverse, then the wheels come off and it literally threatens collapse.

That happens to be the system that we've all inherited.  I'm sure it made a lot of sense when the world had a billion or fewer people on it and the horizons were seemingly limitless, but now it's just a vast liability.  And yet the central banks and politicians cannot imagine any other system. Not because the ideas themselves are terribly difficult (they are actually quite simple), but because they run so counter to their entrenched belief systems that they'd most likely reject them before they even got close enough to cause mild discomfort.

Currently, the U.S. debt-to-GDP ratio stands at around 350% in 2013.  This is a historically elevated number, so much so that we really don't have anything in our economic history books to tell us what comes next.  The Federal Reserve thinks that robust economic growth can reduce that imbalance painlessly.

But looking at the past 220 years of history, we find that the average yearly growth in U.S. GDP has been 3.8%:

Now, I have some quibbles with the idea that the U.S. will be able to sustain that long-run average of 3.8% over the next 30 years, because debt levels are already crushing growth, as are high oil prices (double whammy!).  But let's spot the Fed every advantage here. 

Between 1980 and 2013, total credit grew by an astonishing 8% per year, compounded. I say "astonishing" because anything growing by 8% per year will fully double every 9 years.

If U.S. GDP grows at 3.8% annually, but credit grows at 8%, this means the nation's debt-to-GDP ratio would balloon to 1,130% by 2043.  That's equivalent to someone with a $50,000 salary carrying $573,000 on their credit card. 

Again, this just seems to be so completely unworkable that I'm pretty certain it's not going to happen.

The alternative of growing credit at roughly the same rate as GDP, ~4% vs. 3.8%, means that not much really changes in regards to debt-to-GDP ratios, but they remain elevated at over 350%.

Of course, the difficulty in this story is that over the past thirty years, GDP has grown at only an average of 2.6%.  The most recent decade was the second worst in 220 years of U.S. economic record-keeping, clocking in at an anemic 1.7%.

If we use the past thirty years of GDP growth (2.6%) as our guide, then the numbers just get a lot worse.  Instead of 1,130% debt-to-GDP under the 8% credit growth future, we come up with a 1,600% debt-to-GDP figure.

 

My expectation is for central banks to just keep trying and then trying harder, doing the same things that is not working currently.  And they will not discuss any concerns that perhaps there's something wrong with their approaches or acknowledge any mistakes they made to help get us into this predicament.

The Fed is desperately trying to recreate the credit growth of the past 30 years, but it will not be able to do this unless the dollar loses a lot of value. 

The reason they want to do this has nothing to do with what's best for you or me or even the nation.  It has to do with the demands of a debt-based fiat money system that simply has to continue growing exponentially in order to survive."

 

This means in the medium term interest rates will stay low despite the Federal Reserve's talk of tapering its bond buying program. Interest rates have to stay low otherwise the Treasury won't be able to pay off the interest on the enormous national debt. Rising interest rates will also crush many larger financial institutions that are now locked into loans and bonds at low interest rates. Once interest rates rise by 3% or more there will be serious hell to pay in the financial markets. For this reason, the Fed won't take their foot off the money creation accelerator. Low interest rates are here to stay. This means the average guy will continue to get screwed out of his savings as inflation eats away at it.

 

There are many opportunities in this situation:

• Buy gold. Gold acts as insurance in case of a catastrophe in the financial system. It is also a hedge against inflation. Gold is timeless wealth and it will be around much longer than the current monetary system. 

• Take advantage of stocks while they are rising.

• Diversify your assets globally. It is absolutely essential to get some of your money outside of a financial system that is not sustainable.

• If you have a loan, take advantage of the rate environment. The past couple years has been a great time to refinance your house.

• If you own or work for a company that is looking to put some extra cash to work in the bond market; look into purchasing 5-10 year tax free muni bond from a water district or school in a financially well off area. Municipals have the most attractive yields in the bond market and one of the lowest default rates at 0.04%. As of November 2013 there is opportunity in this market. Hedge this investment by shorting a small amount of treasuries with the ETF TBT. By doing this you are calling the Feds raising rates bluff. Please do not take this last piece of advice unless you do the respective research.

The long term trend is entrenched deep in American culture. We live in a quick fix culture that will insure that bad decisions will continue to get made every time a crisis arises. The U.S. debt will never get addressed in a serious manner because politicians don't want to make the hard decision it requires.  Politicians just want to be reelected and all of their decisions are based on that premise. The can will be kicked down the road until it is too late and their hands will be forced.

This quick fix mentality is entrenched in the central banking system as well. Central banks response to any crisis or just a normal event for that matter will be to expand their balance sheet and create more currency units. They do this because in the short term they see an initial boost in the economic activity as the new money filters into the system. Unfortunately the long term consequences of these policies rob the citizens of their wealth and purchasing power. These actions also create a debt based society where almost nothing is affordable. This lowers the standard of living for all but those in power.

The long term trend of this quick fix American mentality will be detrimental. For every issue that comes up in society, money is thrown at the problem and it will ensure the bankruptcy of the nation. In fact, we are already bankrupt and the trend will continue until it cannot anymore.

By identifying this trend you can position yourself financially and politically. The best thing you can do is to diversify your financial assets globally across many different countries. Open foreign bank accounts, purchase foreign stocks and store precious metals abroad. Everyone should consider getting dual citizenship or applying for residency in another country. This is important because when countries enter the final stages of bankruptcy history tells us things turn really bad. Governments typically confiscate citizen's wealth, capital controls are set, unemployment escalates, social unrest spreads to the street, and wars are started. Take the appropriate steps. You don't lose anything by adding to your alternatives.

It is important for everyone to think for themselves and evaluate the trends in society. By looking at the cause and effect of policies, market events, and business decisions you can positively position yourself for coming events. If you keep your eyes open and brain ticking you can make the trend your friend.

Signing Off,

T. Norman

"Behind the Pentagon’s doctored ledgers, a running tally of epic waste" (CNBC)

Linda Woodford spent the last 15 years of her career inserting phony numbers in the U.S. Department of Defense's accounts.

Every month until she retired in 2011, she says, the day came when the Navy would start dumping numbers on the Cleveland, Ohio, office of the Defense Finance and Accounting Service, the Pentagon's main accounting agency. Using the data they received, Woodford and her fellow DFAS accountants there set about preparing monthly reports to square the Navy's books with the U.S. Treasury's—a balancing-the-checkbook maneuver required of all the military services and other Pentagon agencies.

And every month, they encountered the same problem. Numbers were missing. Numbers were clearly wrong. Numbers came with no explanation of how the money had been spent or which congressional appropriation it came from. "A lot of times there were issues of numbers being inaccurate," Woodford says. "We didn't have the detail … for a lot of it."

The data flooded in just two days before deadline. As the clock ticked down, Woodford says, staff were able to resolve a lot of the false entries through hurried calls and emails to Navy personnel, but many mystery numbers remained. For those, Woodford and her colleagues were told by superiors to take "unsubstantiated change actions" - in other words, enter false numbers, commonly called "plugs," to make the Navy's totals match the Treasury's.

A review of multiple reports from oversight agencies in recent years shows that the Pentagon also has systematically ignored warnings about its accounting practices. "These types of adjustments, made without supporting documentation … can mask much larger problems in the original accounting data," the Government Accountability Office, the investigative arm of Congress, said in a December 2011 report.

As the use of plugs indicates, pay errors are only a small part of the sums that annually disappear into the vast bureaucracy that manages more than half of all annual government outlays approved by Congress. The Defense Department's 2012 budget totaled $565.8 billion, more than the annual defense budgets of the 10 next largest military spenders combined, including Russia and China. How much of that money is spent as intended is impossible to determine.

It said that $585.6 million of the 2012 figure was attributable to missing records. The remaining $8 billion-plus represented what Pentagon officials say are legitimate discrepancies. However, a source with knowledge of the Pentagon's accounting processes said that because the report and others like it aren't audited, they may conceal large amounts of additional plugs and other accounting problems.









References:
http://www.cnbc.com/id/101206230

http://www.peakprosperity.com/