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10.15.2014 Financial Intelligence Report Bookmark

Fake Facts You Believe

One of the problems you face when you write a newsletter that goes out to thousands of folks, is that often the things you say…are diametrically opposed to what people have taken as fact for years.  Then they have to try and figure out if I’m simply nuts, or maybe realize that they’ve been shoveled a bucket of horse hockey all those years.  It causes stress I’m sure.

For instance we all know that Eve ate an apple in the Garden of Eden right? Well not so fast. She ate from the fruit of the tree of knowledge of good and evil. Not once is it mentioned in the Bible that it was an apple. It probably wasn’t. Yet it’s taken as a generalized fact that she ate an apple.
 Fake Facts You Believe

One of the problems you face when you write a newsletter that goes out to thousands of folks, is that often the things you say…are diametrically opposed to what people have taken as fact for years.  Then they have to try and figure out if I’m simply nuts, or maybe realize that they’ve been shoveled a bucket of horse hockey all those years.  It causes stress I’m sure.

For instance we all know that Eve ate an apple in the Garden of Eden right? Well not so fast. She ate from the fruit of the tree of knowledge of good and evil. Not once is it mentioned in the Bible that it was an apple. It probably wasn’t. Yet it’s taken as a generalized fact that she ate an apple.

There are thousands of these so called facts that people believe in, simply because the story has always “said so”. Someone tells it to you, you figure “that sounds about right” and you go on for the rest of your life believing it.  Consider the tale of Paul Revere. Every school child knows of his midnight ride and his iconic standing on the riverbank awaiting the signal of one if by land, two if by sea.  Unfortunately it didn’t happen that way. Old Paul wasn’t alone, he was with two others and the Brittish caught them. Paul never completed his mission, just a local doctor named Prescott escaped and made it to Concord.  But again, in the folklore of history, everyone just goes with the Paul Revere story. It sounds good.

Napoleon wasn’t short, Einstein didn’t fail mathematics as a kid, Lightening can strike twice, 3 times or even a dozen times in the same place, no bats are blind, Lemmings don’t periodically hurl themselves off cliffs and commit suicide, etc etc.  Again, a lot of what you hear is hand-me-down folklore, nothing more.

In my world of “economic forensics” where I dig under the surface and try and discover the facts for people, nothing is more certain than this; “most” of the things you believe in as facts, are nothing but bad folklore. The most blatant of which of course is the notion that the markets are “free”. They aren’t and haven’t been for almost two decades now. But that one is easy to see, and more and more people are finally awake to it.

But the one that has stuck in my craw for years untold, the one that makes me livid beyond reason is the double whammy lie that Wall Street and our Federal Reserve lays on us about inflation. First they say it doesn’t exist and second they say it is “necessary” for a strong economy. Both of these accepted “facts” are complete and utter Bee Ess of the highest degree. Yet it is the mantra of our economic “leaders” and thinkers of higher education.

First off, inflation is roaring. Now let’s get stupid for a minute and explain what inflation is.  The dictionary says it is: 1) an increase in the money supply, 2) a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services. Well we’ve certainly seen an increase in the money supply and there’s no shortage of credit available when every furniture store on earth is offering no down, no payments for 2 years.

So we have the text book definition of inflation everywhere we look. As far as rising prices, if you have to eat, buy electricity, go to college, see a doctor, enjoy a movie, take a taxi, repair your car, buy insurance, or a million other things… you know that prices are inflating. Yet the idiots at the Federal Reserve keep telling us it is lower than their 2% target rate and we need more. What’s that about?

The Fed’s tell us they are always concerned about “deflation” which is of course falling prices. They say that’s the worst thing on earth and they’re hell-bent to do anything in their power to stop it from happening.  But I ask the question.. uhm, why do we hate deflation?  See, I personally LOVE the stuff.

I wrote an article about this way back in 2005. I was amazed at the sophomoric responses I got to it. My thesis was simple. Forget trying to manufacture 2% inflation and let the market forces decide what’s best. Think of it like this… isn’t Wal-mart the leader in “low prices?” They are. And yet they don’t go out of business, as millions of people flock there every day to get lower prices. So if low prices were bad, WMT would be belly up, no? Yes. But they’re not.  Wal-mart is our nation’s largest employer.

Likewise I do not know ONE, and I mean that literally; not ONE person that says to me “I wish the product I want would go up in price before I buy it”. If you find that person, please send him directly to the Betty Ford clinic.  No, the fact is that everyone loves a bargain. Everyone wants to pay less for things. But our idiotic agenda driven leaders say we’re all nuts and they know better. I guess you have to be a fellow in lucasion mathematics to understand how inflating prices is somehow good for me.

Their theory is that if you know prices are going to fall, you won’t buy that washing machine, refrigerator, car, dress, etc. That action will stop the economy in its tracks and must be avoided. But I ask, are they nuts? It is the guy with the big sales that has the packed showrooms. It’s why Amazon and Ebay sell more than all the mom and pop stores on the planet. People don’t delay their purchases for ever waiting on lower prices. They jump on lower prices. Likewise if it’s an emergency situation, no one gives a thought about “maybe it would be lower next year”.   I have never put off replacing a broken heater ,radiator, tire, refrigerator, or anything else because I could hope for it cheaper the next day.

To believe their story I’d have to actually know someone who wants a new kitchen, and has the money to have it redone, saying.. but we’re going to wait a couple years and do it when its cheaper. Sorry. This is the dot com world. This is the instant gratification world. We want what we want and we want it now. Lower prices just lets us get it now instead of later. It does NOT affect consumer spending on retail items.  

Look at electronics. They’re notorious for coming out high and seeing the prices fall. Yet despite KNOWING prices will fall, people camp out for 3 weeks on sidewalks to get a new version Iphone.  Think about that. People will sit in a cardboard box in the winter to spend TOP dollar on a new gadget, even though they know they could get it cheaper from the comfort of their living rooms in a couple months. None the less, the spinner heads continue to tell us lower prices will stop the economy in its tracks.

Yet we have empirical proof that their theory is baloney. In fact, THEY say it is baloney in their own writings and research!  Here’s some research from a band of Federal Reserve economists:

The only episode in which we find evidence of a link between deflation and depression is the Great Depression (1929-34). We find virtually no evidence of such a link in any other period. ... What is striking is that nearly 90% of the episodes with deflation did not have depression. In a broad historical context, beyond the Great Depression, the notion that deflation and depression are linked virtually disappears.

Well isn’t that something? They tell us deflation will send us into a death spiral ending in a supernova implosion. But their research suggests nothing of the sort. Go figure. So, since that theory fails, then they have to dream up the ‘profits” angle. In that scenario, if prices fall then the income on the product falls and the company makes less money. Well that’s all fine and dandy as long as the wholesale price remains high. But if the wholesale prices decline ( as they would) then the profit margins remain the same, no matter the selling price at retail.

So if falling prices don’t kill economies ( and it doesn’t) and the idea of killing corporate profits isn’t true, why are they so rabid about creating the perpetual “2% a year” inflation? Because it covers their butts.

As central bankers continue to pull the levers and push the buttons that supposedly will result in a “perfect” economy, they generally screw it up big time. The only reason we have booms and busts instead of normal business cycles is because these lunatics never know when to leave well enough alone. They’re always pushing rates, or lowering rates, or pushing money into the system or draining it out of the system. They act like they know what they’re doing but the economic records show they know nothing.  They cause more trouble than they solve by far.

But they also know that if they keep the public snowed into thinking that you need a 2% increase in the money supply for the economy to move along, they can print money and dole it out to the Government agencies that are always spending more than they take in, and it doesn’t look so blatant.

Think about it for a minute folks. 2% per YEAR is a LOT of money in a 17 trillion dollar economy. If it was known that you don’t need to inflate by ANY amount on a yearly basis to have a well functioning economy, where would those tens of billions go? Right to Uncle Sam and his pork projects, welfare, social programs etc. Then the masses might start asking all sorts of ugly questions like…why is the nation broke? Why aren’t there any jobs? Where’s the money going? Why don’t we have a functioning budget?

They always need a cover as to why they’re printing so much money. Don’t forget one of the big reasons we were yanked off a loose gold standard in 1971 was because they were printing more money than our gold could cover.  They needed to print more money, but we had this charter in place locking the amount of money loosely to gold, and it was getting stretched to ridiculous measure. They had no choice but to separate from a gold standard…we didn’t have enough gold to cover. Ever since then, the Fed’s have begun their insane push for ever more inflation.

The saddest part of all is that they know inflation is much hotter than 2%. They know it’s running at the 8% plus level, but can’t admit that because they need to print up money for Treasuries, and their banker buddies etc. They need the 2% mantra to help cover the fact they’ve broken the American economy.

No folks, the facts say we don’t need 2% manufactured inflation; we don’t need any inflation at all. Deflation isn’t the kiss of death, it lets consumers get more value, and history shows that except for real estate, they generally buy more product and spur more investment for expansion.  The inflation lies are just that, more lies from our unelected unaccountable Federal Reserve.  

By the way, these criminals are so completely corrupt that during the 2008 – 9 meltdowns and resulting bail outs; recent court documents show that Ben Bernanke wouldn’t use his own name in E-mails. He resorted to using the name Quince Edward  ( notice the QE) so he wouldn’t be blamed for anything going wrong. That’s the character of the folks running this show. Feel better now?

NOTE> I’m often asked about when I’m doing radio interviews or shows, and I should do a lot better job of letting you all know. On Thursday I’ll be doing two shows with Donnie Cogswell at the philsgang.com show. Here’s a few of the stations we’ll be on…
Boca Raton, FL     740 AM
TAMPA, FL     820
ORLANDO     1190
LAS VEGAS, NV     720
SPOKANE/ WA     1230

If you’re not in one of those areas, the show will be recorded, simply go to www.philsgang.com and give it a listen!

The Market…

One of the few things you can say about this market is “wow”. By now you all know just how much carnage has been wrought, as Monday we fell like a rock again, Tuesday they managed to hold us pretty flat and this morning we fell for 370 points right after the open.  In fact from the closing high on “Ali-baba” IPO day, to the low at about 9:50 am today, we had fallen 1334 DOW points.

Yet because the market is so “high”, losing 1300 points didn’t even make it into the “10%” correction column.  We were down about 7.6% at that point. Then they put in a mighty reversal bounce, and from down 370 we were down just 115. That first bounce didn’t hold, and we were down over 200 again by 11am, but it was at least a “save”.

When we get a market sell off, the TV reporters go nuts. Nothing is more entertaining than watching the shills on CNBC freak out and drag on the cheerleaders. But to a tee, none of them ever really dig down to the nitty-gritty of the situation. Yes they can blame the second case of Ebola. Yes they can blame the weak Retail sales report. But NONE of them are willing to say that “hey maybe it is because for the first time in 5 years the Fed’s don’t have our backs”.  

Over the past 5 years, they’ve been able to buy every 4% dip and do it with hubris. It was easy for them because they knew the Fed’s were there pumping 85 billion dollars a month into the system. But now they’re not so eager to buy these dips. If the Fed isn’t there with Billions in QE, then they’re buying based on earnings and economic growth. That’s a problem since the economic news continues to come in lousy, and they know that most of the earnings were based on Corporate buy backs.

Just as a note, Intel for instance. In the 5.7billion in cash they generated, they used 4.2 billion of it to buy back their own stock, which tightened the float and lowered their tax rate. So they beat the estimates on “financial engineering”.

Wall Street is now desperate for the Fed’s to reverse course and rush in with more QE. Will they? Well, we’ll be discussing that this Sunday in the newsletter and I think you all should read that letter very carefully. It’s going to have a lot of twists and turns in it and it will read like a spy novel. But it will be a significant letter.  

After a decent bounce off the morning lows, the market plunged right back down to -350 points. Why? That second nurse that was found to have Ebola apparently was on a commercial airline two days before symptoms showed up. She flew from Cleveland to Texas, and of course the panic is that she might have infected folks on that plane. That sent a shiver through the market and anyone that needed the right excuse to sell, went ahead and sold.

And it got worse. By 2 pm we’d seen the DOW down 450 points.  Now this is pretty common action after a big fall. It’s called “margin calls”. If you’re not familiar with them, here’s the situation. A lot of funds use “leverage” meaning they borrow money and use that borrowed money to buy more stocks.  Well that’s great when stocks are going up, but when they’re going down, the “lender” of that margin money starts getting nervous. When you hit a certain level of loss, he’ll call you up and say “put more money in your account, OR sell enough stock to replace the money you’ve borrowed.”

So it is quite common after a huge sell off like we’ve had where we’re down over 1K points in a couple weeks, that “forced” selling hits. Today it wasn’t all about Ebola, it was Ebola, folks wanting out anyway, and hedge funds getting margin calls.

As we came into the final hour, the question was this... was today some form of capitulation day? It looked like it could have been as we were moving sharply off the lows. We were down just about 225  and then “pow” down we went again. Why? Walmart came out and cut their sales forecast in HALF.  Read again. HALF. The outfit with every day low prices can’t hit their sales guidance and the market took it like a punch in the gut.  Once again we were down 315 points. Once again however, the buy the dip crowd came rushing in.  Wow what a roller coaster.

So we closed out the day with the DOW down about 172, wildly above the lows of the day, but still down a lot. Was the big drop to -460 “it”? Was that the capitulation? Do we just levitate higher from here? Here’s my thinking. The S&P was off 9% at the low of the day. Many will think “that’s close enough to ten percent” and want in. But I’m thinking that any bounce we do get is just a headfake.  Maybe we see the S&P make it up near it’s 200 day, but then I think we come back down. In other words, this is strictly a traders market. The next couple weeks are going to be quite choppy and sloppy. My best guess is that we do have more downside to come, but we’ll probably see a bit of a bounce first.  The S&P has been blood red for 5 straight days. It won’t stay red for ever. So yes, I think a bounce is in the cards.  A move over 1874 is probably buyable for a short run to the 1905 level. I wouldn’t buy under 1874 and if we lose 1833, it’s bad, and then 1810… we’re going considerably lower.

Finally, we sold half our short on the Russell on Monday. We’re still short 200 shares by being “long” the TZA. (inverse ETF) The half we sold got us 25% and we’re holding the other half with a stop at about 16.50.  Have a great evening and we’ll see you all on Sunday.


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