~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Financial Intelligence Report
The Newsletter for people willing to take control of their financial future
November 9, 2014
This is today's issue of the Financial Intelligence Report
Contributing Editors: Bob Rinear, Robert Foster, Ted, Chuck and the gang!
Wall Street Lunacy donated by Janet Yellen, and Central Bankers the world over!
Part 1: General Commentary
Part 2: Market Commentary
******************************************************************All The Tricks
One of the interesting things about putting out a newsletter for almost 20 years is that we've covered so many topics that you really can't even remember half of them. Think about the sheer numbers for a minute. Back in the beginning of our publishing we put out 3 letters a week. It wasn't until we launched the Insiders Club, where we went to two per week. But even if you just consider 2 letters per week, times 52 weeks, times 20 years, you arrive at a pretty large number...almost 2100 full length articles. That's a "whole lotta topics" for sure, and while we haven't covered everything, we're pretty secure in thinking we've covered most of the really important things that affect you in your daily life.
Another interesting factoid is that we've been doing this almost longer than just about anyone else as far as online. Sure there were mailed versions of Financial newsletters way back in the 80's but as far as online, there weren't that many of them back when our first crude letters started going out in late 2004. So it warms our hearts and our memories when we see others pick up a topic we've written about in the past, and explain it to their audiences. One of those hit me this week when "Tyler Durden" put out a note about how only an economist could transform a 400% price increase into a 7% decline.
It got me thinking about all the changes we've seen over the past couple decades and just how completely bizarre the world of economics has become. In fact the changes are so rapid and so extraordinary, that they blot out the stuff we once considered incredibly important. Sort of like when the Italian Government stated that they'd include the proceeds from drug trafficking and prostitution in their GDP calculations. It was so "in your face" that more mundane things paled in comparison.
What good old Tyler was talking about was Hedonic pricing adjustments. We first wrote about this way back in the late 90's and ONLY after my late friend Bob Chapman had mentioned it in one of his interviews. For those that don't know, Bob was something of a mentor for me. He was the only sane voice in the wilderness, and for many years we swapped ideas and he was instrumental in making sure I was really understanding how things truly worked. So what is this mystery called the Hedonic Quality Adjustment Method anyway? Let's look at it in terms you're all going to understand.
Every one of you has gone to the store, found a product to be considerably more expensive than "it used to be" and yet the Fed's and the politicians continue to cry that we're seeing inflation under 2% and we need more. We've evidently got so much disinflation that I'm going broke over the high prices. But let me tell you all, this is NOT something new, this has been going on for over 40 years. So lets take a little history lesson so you can understand
Federal Reserve banks, AND the politicians hate with all their might to have to tell people that inflation might be 3 times higher than they're being told. For one it makes the citizenry mad because their purchasing power is eroding. Secondly it means Uncle Sam has to pay more in Social Security COLA raises. Thirdly, it goes against everything they always tell us about how inflation is "subdued". It distorts true GDP readings, and allows the Criminal Federal Reserve to continue to inflate bubbles, the only thing they've ever been good at.
Yet it was a problem for them, because the 800 pound elephant in the room was always the same. How on earth do you hide the fact that YES prices are soaring on things while it was so obvious? In other words, any schlub could wander down to the store and see that goods were costing more. How could they twist it??
They devised a very complicated "formula" to hide the fraud. At first it was called the Quality Adjustment Factor, and then later changed to the Quality Adjustment Method. The idea behind the whole scam was that they'd figure out a way to suggest that it really isn't prices that are rising, it is because the goods are now of so much better quality, and of higher technological capacity that they are WORTH more. Basically these folks were trying to say that everyone was simply wrong. Prices only seemed to be going up because the quality was so much better now.
Now this wasn't anything new. This started way back in 1967 folks. This method of involving the Quality of a product into the computation of its "cost" was introduced by the financier oligarchy during Arthur Burns's regime at the Federal Reserve, and spread by BLS statisticians. It was set up to exclude anywhere from one-quarter to three-quarters of true inflation. It works on the continuous assumption that the quality of goods is always improving: therefore if the price of a product rose 10%, (and the statisticians of the BLS could claim two-thirds of the price increase was due to improved quality) , then the inflation of that product's price is reported as only 3.3%
In the hyper inflationary 70's, they needed all the help they could get to try and convince the public that prices weren't soaring, because they certainly were. To see an example of just how good this madness was at completely distorting the true numbers, consider this...
Between 1980 and 1981, for example, the average price of a new car rose from $7,574 to $8,910, an increase of $1,336. Based on that, it is possible to calculate the rate of car-price inflation for 1981, at 17.6%, a very substantial increase. But the wizards at the BLS got rid of most of that increase. In a BLS document named : "Quality Changes for Passenger Cars - 1969-99," the BLS initially attributed 99% of the price increase to "improved quality."
Then, after it made further adjustments, the BLS finally attributed 66% of the 1981 increase in the price of a car to "improved quality," and 34% to actual price increase. The BLS reported that only $454 of the $1,336 price increase in 1981 was actually an increase in price. Thus, the BLS threw away two-thirds, or $882, of the price increase you paid in 1981. It reported an auto-price inflation rate of just 6.0%.
It certainly didn't stop there.The BLS has still other weapons to "reduce" inflation. In the 1990s, the Senate Finance Committee established the Advisory Commission to Study the Consumer Price Index, which was staffed by people whose aim was to reduce the inflation rate further, through various shams and ruses. The Boskin Commission in 1996 asserted that there were biases in the price index: traditional matched model indexes can substantially overestimate inflation, because they are not able to measure the impact of peculiarities of specific industries such as fast rotation of goods, huge quality differences among products on the market, and short product life cycle.
The Commission showed that the usage of matched model indexes (traditional price indexes) leads to an overestimation of inflation by 0.6% per year in the US official CPI. Information and Communications Technology (ICT) products led both to an increase in capital stock and labor productivity growth
Now they were going to run with the idea that not ONLY was the quality better, there was so much more value in the technology inside the products that they could even expand their financial gimmickry. It was a supreme double dip for sure, but since the public bought the first scam, they figured they'd pull this one off too.
Well they did and in spectacular fashion. As the growth of computers and chips soared in the 90's they used these new computations to again snowball everyone into thinking that the shiny new processor they were buying wasn't really more expensive, it was simply more Valuable because it was faster. This scheme got them years and years of fake GDP growth, lowered expenses for social programs, the whole bit.
This is why I scream at the top of my lungs folks. Inflation is indeed SOARING, but they've masked it for 50 years. At least "back then" we had the price/wage spiral. At least wages were rising to try and keep up with the price increases. But today? NO. Wages as measured by virtually any metric have been static for ten years. Yet the prices keep going up and up.
So is it any wonder why I look at our "official" releases with a skeptical eye? Like Friday's jobs release. Sure the headline sounded wonderful, we added 214K jobs right? And the unemployment rate dropped to 5.8%, another wonderful number, right? Not so fast. The BLS entered 137K of those jobs via the "Birth/Death" model. Jobs we have no proof of existing. Next up, the quality of the jobs. One out of every five was in the food and beverage industry. Waitresses and bartenders. Wage growth missed the expectations. Again, not the kind of report that should get anyone warm and fuzzy. Yet the commentators are giddy over it. More hype and delusion.
The bottom line is that ANYTHING Uncle Sam puts out is fake. From jobs, to inflation, to debt, to you name it, it's been doctored, pimped and tarted up like a London Prostitute. You cannot believe a single headline they produce, you have to take the time to drill down through the release and see if you can really connect the true dots. Those dot's will tell you where things really stand. Don't you enjoy being lied to by the very folks we put in charge? Me neither. The Market...
It's been 17 trading days since Fed head Dullard, (oops, sorry Bullard) hinted that maybe the QE process should be extended. Since that mention during the depths of the 10% pullback; the DOW has gained 1638 points. That's an average of almost 100 points per trading day.
Did we cure cancer? Did peace break out? Did they solve the mystery of the missing dryer sock? Unfortunately no, all they did was jawbone about more QE being possible, and then the Bank of Japan went full stupid and blatantly announced to the world that they'd bury the planet in worthless yen.
Not a single thing has changed fundamentally to indicate that we should be soaring like this. Just more debt, which they can leverage and buy more debt with. Let me tell you all in no uncertain fashion...you are all real time witness to the destruction of the global economy, and this is not going to end well. But between now and that ultimate end, it's going to be incredibly interesting to see just how bizarre things can get.
You guys all know my take on things. The Fed's are gong to continue to tell us the US is the engine of growth and they'll continue to hint about rate hikes coming sooner than later. We all know that's a crock of steaming crap, as they cannot raise rates. Their entire fiat-junky system is based on ever rising inflation so they can always create more debt, and rising rates gets in the way of that equation. So hiking rates is nothing but jawboning.
The Dollar strength already has them sweating bullets. Hiking rates would push the dollar even higher. That's a double no-no, so ignore their clap-trap about hiking rates. No, the Fed's are going to continue to tell us how great our recovery is, until something dramatic happens that they can blame our troubles on.
But the real question is the market. Can it just continue to go higher and higher and higher, in the face of part time jobs, no wage growth, food inflation, etc? It can. There it is, I said it. It most certainly can and I have the proof. They've levitated the market all year, while mortgage applications fell, while Obama care hit family incomes, while Ebola was in vogue, while the IRS was lying to Congress, while ISIS was storming the Mid-East, etc. So it is obvious that indeed they "can" push the market higher and higher on "nothing".
If they can do it in the face of all that, what's to stop it? Literally nothing fundamental. This market will only fall when 1) the big banks want to yank the rug and frighten the masses, or 2) they change the game somehow and can make more money being short, or 3) something really ugly hits the news, and I'm talking big scale ugly. Like a dirty bomb or a NATO/Russia war, or what have you.
But we do however have proof that the market can at times at least fall by 10% because it did that a month ago. That's the boogeyman I'm in fear of right now. No matter how corrupt, no matter how much money they print, no market can just march straight up for ever. Read that again, we've run 1600+ points in 17 sessions. I'm not positive but I think that's close to a record. How much further can this particular blast last?
We are at the edges of a "projected" wave pattern. In other words, when a market breaks free to all time new highs, you have no overhead resistances to judge the next stop at. So what you do is "extrapolate" various wave patterns and project where the next stop off should be. My back of the napkin numbers say that level is S&P 2040 - 2050 and DOW 17,500 - 600.
As you can see, we're almost there. So if a pause is coming, or a corrective pull back, we're awful close to it. My guess is that we do a bit of fading this week. It could be the run of the mill 2 - 4% pull back, or it could again morph into something deeper but either way, I think it's coming.
Then after that pull back, I think they'll regroup and shoot us higher into the year end. So what's the "actionable" play here? If I'm right and we experience a pullback over the next week or so, watch the relative strengths of the particular sectors and stocks you're interested in. A common strategy is to watch the stocks that hold up the best in a down turn and then buy them for the upswing. They usually move the best.
We are carrying 3 long side positions in our short term trading account. We've got the Q's, and we've got BTU and NRG. The Q's are up about 10% for us, so if the pull back does start to materialize, we'll take our profits on that and ring the register so to speak. Then we'll probably look to reenter later. BTU and NRG are newer positions for us, but thankfully they're performing very well. We've got nice profits in both.
The bottom line is that last week the market had a lot of things to look brave for. The Elections first and then the jobs report later gave them excuses to hold things up. Now all that stuff is behind us and the market is going to have to stand on its own. That will be a bit harder now without QE in full effect, and we should see more volatile swings.
Enjoy your weekend and we'll see you all on Wednesday.
PS.. If you'd like to see the exact stocks/options/metals/ETF's and 401K moves we will be looking at for this week, please consider becoming a member of the "Insiders Club" located here: www.investyourself.com