Saturday, March 26, 2011

The recovery is just coming along nicely as he had foreseen, says the Emperor Ben Bernanke in Star Wars

Today's post should get you to think about your investments in a way maybe you hadn't before. Do you remember the Public Service announcement which used to say, "Do you know where your kids are?" Well I ask you the same today about your investments. never has this question been more important. The market has had an extraordinary recovery in 2010 and it appears has in this first quarter of 2011. Many analysts and critics alike have professed the Bull market has returned. Could this be true? Let's take a look at the news and data coming out this first quarter and enjoy the recovery to its fullest.

Let's start with the Unemployment rate. According to the Bureau of Labor Statistics (this sounds mathematical doesn't it? ), the Unemployment rate is now at 8.9% having come down from a high of 9.8%. That is real progress, wouldn't you say? I don't think you have a PhD in Mathematics, but I think you can do a minor calculation. Here's the question, how should you calculate the Unemployment rate? Should it be calculated by counting the total labor force divided by the number of people not working? If you answered yes, you would be correct. But that is not how it is calculated. It is calculated by taking the number of people receiving unemployment benefits divided by the total labor force. So if people have run out of Unemployment benefits they are not counted as unemployed, nor are people who have given up looking for work, nor those who can only work part time as there are no full time jobs available. Interesting isn't it. It used to count anyone not working back in the 1930's and it too was reported by the Bureau of Labor Statistics. Back then the Unemployment rate was about 20-25%, depending on which month you are talking about. But that was during the Great Depression. If you use the same formula for today's calculation, it has been reported the real unemployment rate is around 18-20%, not that far from the same rate during the Great Depression. Here in the chart below is the reported Unemployment rate since 1950.

OK, let's be more optimistic and focus on some world news that would give us a sense that things are getting better. Oil prices have surged in recent weeks to over $106/barrel. Many believe it is a temporary spike. After all there are a few minor concerns in the Middle East right now. The latest concern is of Libya and Gaddafi. His people have grown tired of him, are feeling little to no hope for a better life since prices for food have soared in recent months as have prices for many goods and precious metals like Gold and Silver. Oh, and besides Libya, there were riots and the ensuing departure of several other Middle East leaders in Tunisia and Egypt who also succumbed to their uprising of the citizens call for their ouster. In recent days, riots have occurred in Bahrain, Syria, and now Jordan and it appears that instability has taken hold of the entire Middle east over rising prices and the lack of any opportunity for the citizens of these countries to have a better life for themselves. They feel hopeless. Remember the protests in Iran last year and the brutal attacks of that government by its people? More protests will happen there as the Iranians see country after country seeking to remove their leaders. And yes, even Saudi Arabia has seen protests and the government has tried to appease the people by giving workers raises and bonuses. Where do you think Oil prices are going to go? I'll bet not down!

But wait, there is good news, the recovery has been steadily improving, just look at the facts. The stock market has gone up, thanks to Fed Chairman Ben Bernanke intervening to support the stock market. How has he done this? By printing money out of thin air. Now I know this has devalued the dollar but I am told that the dollar is strong by the main authority on this matter, Treasury Sec. Tim Geithner. That should be good enough, right? Well there has been a run-up in Gold and Silver to record highs, There must be some correlation there to our currency value. The chart below shows the value of an average home in terms of ounces of Gold needed to purchase it. You will notice that this index has dropped significantly in recent years. What it means is that it takes the same number of ounces to buy your home today as it did back in 1983. That's because the value of Gold in U.S. Dollars has soared and the value of your homes has dropped. Scary, isn't it!

And all this talk about changing the U.S. Dollar from remaining as the Reserve currency of the world must be idle chatter, even though it has been discussed at the IMF (International Monetary Fund) as well as by countries like Japan, Russia, China and some Middle Eastern countries as well. Remember $0.42 of every dollar we spend is for the interest on our debt. That is unsustainable and is part of the reason there is talk of changing the status of the US. Dollar as the Reserve Currency of the world. The Chinese have stopped buying our short term debt as have the Japanese with all the problems they face now because of the Earthquake, Tsunami and now Nuclear reactor meltdowns. Our supplies from japan will significantly be impacted which will affect 2nd, 3rd and 4th quarter GDP here in the U.S. We haven't yet been impacted as the shipments to the US have only begun to stop. All electronics from there will be affected as will the auto industry as many parts are made in Japan for the US Auto manufacturers.

But wait, our recovery has been making steady progress and we are doing well, according to Fed. Chairman Ben Bernanke. Of course he says that we must reign in the debt at the appropriate time and has asked law makers (politicians) to set in place a plan to get serious to reduce the debt as it is unsustainable for the long run. But politicians and the President alike have refused to do anything meaningful to address entitlements like Medicare and Social Security or the gigantic Defense Budget Spending, so here we are as we enter election year politics. See, things are better! Fourth quarter 2010 GDP was reported yesterday to be 3.1%, revised up from the previous estimate of 2.8%. That was 6 months ago and they still are playing with the numbers to show us we did good last year. Let's look at the chart below of GDP since 1950 and see how we are doing now.

As I look at this chart on GDP, I am not impressed. It is clear that during the Bush years, and especially the latter years of his Administration, we were not expanding and we haven't been doing that well for a very long time.

Last but not least, I thought I would show the chart of the Dow focusing again on the volume of this latest rise. You will see in the chart below that this week had prices rising with an unconvinced investor as the volume dropped sharply this week. So much for the bullish case. When prices rise and volume drops this is definitely a bearish sign that the market is about to turn down sharply and that the Bull is tired. So much for Bernanke's manipulation of the market. He has made it much worse. But in the end, the Emperor loses if you remember your Star Wars stories. FAIR WARNING!!!

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