Agora Financial’s Rude Awakening

Jump to Comments

Dubai, UAE

· Inside the Fed’s policy pipes – Is inflation on its way sooner than you think?
· Gold jumps back up to the $830s on the sinking greenback,
· When every automaker and camel trader demands a bailout and more…

Joel Bowman, reporting from Dubai in the Persian Gulf…

Sam Ewing once quipped, “Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.”

We imagine the Middle East version of this might be something like, “Inflation is when you pay 1,000 dirhams for the 500 dirham camel you used to get for 250 dirhams back when you could still ride the thing.”

At an official rate of 11.1%, inflation in the emirates is more than a pesky nuisance for camel traders. The local media – by and large a centrally monitored public relations machine – blames the high inflation figure on exorbitant demand pushing up prices.

But, as we know, all this misses entirely the point. Inflation has come to be defined in mainstream media as the increase in the price of goods, and the wages required to produce those goods. Whether we are discussing camels in the Middle East or the cost of a haircut in New York, we must remember that the price we see is only the result of inflation, not inflation itself.

That is why it is so misleading to employ measures such as CPI or PPI. In addition to being subject to the whimsical redefinitions of the government offices producing the figure, these measures also provide a cloak under which the Fed can drive real inflation, i.e., the increase in the quantity of money and money substitutes. When the rate of increase in the accepted medium of exchange exceeds the supply of goods it is chasing, we see prices rise.

In an interrogation of Fed Head, Ben Bernanke, back in December of 2007, Congressman Ron Paul put it this way:

“Currently, of course, we can’t follow the money supply with M3 but we can follow one of your statistics, which is the MZM — the ready cash available — and we see that inflation is alive and well. That money supply figure is going up about 20 percent per annualized.”

The inimitable Paul then went on to admonish Bernanke for artificially distorting the economy, likening the Federal Reserve to a common price fixer. Now, a year after the congressman’s comments, governments around the world have promised trillions of dollars in new cash to revive flailing industries in the form of bailouts and emergency bridging loans. It seems as though every banker, automaker and camel trader has his hand outstretched. So where does all this money come from, many people wonder, and what effect will it have on the future price of oil, gold and haircuts?

In the following column, Dan Amoss, editor of the Strategic Short Report, walks us through the policies of the price fixers and wonders how much longer the world will accept an increasingly vulnerable paper currency for good, hard assets. Enjoy…

— Agora Financial Reserve Is Open Again —

Claim Your “One-Time Dividend” From Agora Financial Headquarters

Tell Me Where to Mail Your $1,500 Check

Open to all new members who respond before midnight, Jan. 1 – you can claim your $1,500 dividend check in two simple steps. Get The Details Right Here

—————————————–

Enter the Price Fixers
By Dan Amoss

The authorities at the Treasury and Fed are clearly scared that this credit crisis will keep feeding on itself. So they are determined to stop it. They are starting to implement variations on the “nuclear” option: quantitative easing.

This is what Ben Bernanke was referring to [back in 2004] when he joked about dropping dollar bills from helicopters. Only this inflation will be more directed at the capital and mortgage markets, rather than just printing dollars to hand out on the street corner.

I consider two of the Treasury and Federal Reserve initiatives to be particularly important.

First, the FDIC will guarantee newly issued bank debt. (Bloomberg summarizes this initiative nicely in this article). I think this is a watershed moment in financial market history. It may turn out to be as important as the original Depression-era guarantee of bank deposits. It will deliver a major jolt to the flat-lining credit markets. It is yet another massive subsidy to the banking system, courtesy of those hoarding U.S. Treasury bonds and dollars (whether they know it or not).

The key quote in the Bloomberg article: The banks, “which haven’t sold dollar-denominated bonds since September, may raise $400-600 billion under the program within six months.”

In the long term, this is probably bad for the banks, because they are giving up their right to pretend that they’re free market institutions. But in the short term, I’ll bet they’ll start putting this idle money to work at a surprising rate.

In recent weeks, commercial banks started hoarding hundreds of billions of newly created dollars at the Fed. A primary reason for this is that many of them were effectively shut out of the debt markets by having to pay rates of 8-10% on unsecured bonds.

The FDIC announcement should change this pretty quickly, which means that all the new fiat money on deposit at the Fed — up to $600 billion at latest count — may find its way first into the capital markets to buy distressed corporate debt at yields of 15-20% and stocks (prompting a year-end rally) and then in the form of new loans to refinance creditworthy borrowers.

The Fed’s second important new inflation policy may be even bigger. With its purchases of Fannie and Freddie debt and mortgage-backed securities, the Fed is now actively targeting mortgage rates — whether or not it officially announces this. The Fed committed to purchase up to $100 billion in Fannie and Freddie debt (which will have the effect of lowering the cost of issuing new mortgages) and up to $500 billion in mortgage-backed securities (which led to an enormous capital gains for any bank or brokerage holding agency paper).

The effect of this announcement of new money targeted at Fannie and Freddie was powerful enough that 30-year mortgage rates immediately fell by about 50 basis points. This action will go a long way toward reducing home price declines and foreclosures, at the expense of debasing the U.S. dollar even further.

It’s even possible that this could mark an end of huge write-downs at the major investment banks. Most of these write-downs had assumed a bleak trajectory of home price declines through next year. But if the rate of housing price declines slows, and the recovery values after foreclosures rise, then the values of mortgage-backed securities and CDOs might actually rise. We’ll find out in the coming months.

Skeptics correctly argue that lower rates won’t do anything for households with underwater mortgages and negative net worth. But keep in mind that we haven’t even seen what types of initiatives the Obama administration and Congress will propose to stimulate housing demand. We can expect they will be creative, invoking the climate of “emergency.” Maybe the federal government will enact a major tax credit for buying an existing home, or even expedite the immigration process for foreigners with money to buy a home and/or highly demanded skill sets.

In short, the housing price decline’s effect on the banking system doesn’t worry me; the consequences of all this new inflation are more worrisome. Right now, the market is totally obsessed with what will likely be a manageable decline of a few percentage points in GDP and a jump in unemployment, while totally ignoring the elephant in the room: what kind of global monetary situation we’ll be facing as soon as next year, and how long it will be possible to trade rapidly devaluing dollars for vital imports like oil.

Joel’s Note: As the resident short selling expert at Agora Financial, Dan’s analysis through out this crisis has been instrumental in delivering stellar profits for our readers. Options on Lehman Bros., for example raked in up to 462% for his readers and his average closed position so far is a whopping 104%.

Impressive as these numbers are, markets won’t always be favorable to short sellers. (although the good ones will usually make money either way.) During commodity booms, for example, it will be those operating in the resource sector who have the best opportunities at their feet. Likewise for small cap investors, technology experts and any other sector of the market.

That’s why Dan’s short selling service is just one of the many tools included in our premium lifetime package, the Agora Financial Reserve. There are plenty of reasons to consider our most elite service – the one time sign-up fee, lifetime membership, access to all our most important market research and, for a limited time, even a $1,500 one time dividend check* – but, for our money, the best reason has got to be the security in knowing that whichever way the market moves, your Reserve membership has you covered and in the know.

As you probably know, we only open the doors to the Reserve a couple of times a year. Now is one of those times. If you really want to get serious about making money, we suggest you grab a pen and paper and read through the following report. We think you’ll quickly see the real value in joining our most elite circle of investors.

* $1,500 check to be mailed by FedEx on Feb. 16, 2009, at 4:00 p.m. Offer only open to those who apply BEFORE Midnight, Jan. 1. Details Here

— When Fear = Profit: A Special Volatility Report —

Bailouts…Deleverging…Government Shenanigans…Unprecedented Volatility…

Put simply, the markets are bucking and kicking like we’ve never seen before .

With such unpredictability, it is difficult to know where to invest, if at all.

There is, however, one man who has been relishing the recent whipsawing market conditions. Steve Sarnoff has been on an absolute tear lately. His last five picks have all more than doubled… and are sitting at cumulative highs of 1,222%.

Take a different approach and learn how to make fear in the markets work FOR you with Steve’s Options Hotline Service Right Here

—————————————–

[Rude Endnote: Most worldwide indexes barely budged overnight, probably awaiting their cue from the U.S. market today and tomorrow. Hong Kong’s Hang Seng moved 0.23% higher and Japan’s Nikkei bumped up about 0.7%. Even India’s Sensex, one of the most volatile indexes of 2008, only managed a .1% dip to the downside.

In Europe, London’s FTSE is down about one quarter of a percent as we write while Germany’s DAX and France’s CAC, among the biggest losers of the day, have fallen 1.1% and 1.4% respectively.

Meanwhile Gold rallied again overnight along with most other commodities. The precious metal piled on another $22 and currently trades at $831 per ounce. Oil managed a $1.80 gain to break $45 per barrel.

On a final endnote, we’ll be conducting a “Best of Rude” series in the coming weeks, where you can vote for your favorite columns of 2008. Keep watching this space for more info on this soon.

Until next time…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com