August 2011 Forest & Trees Report

8/4/2019 August 2011 Forest & Trees Report

1/7

Forest & Treesreport

August, 2011

BeckerAdvisory Services Issue 4

BeckerAdvisory.com 1

Forefathers thoughts

If the American People allow private banks to control theissuance of their currency, first by inflation and then bydeflation, the banks and corporations that will grow uparound them will deprive the People of all their Property untiltheir Children will wake up homeless on the continent their

Fathers conquered.- Thomas Jefferson letter to Treasury Secretary1802

In the current environment you cannot be reminded enough of what Jeffersons thoughts were on central banks. I think it is clear from theconstitution that the founding fathers vision of the US government was fora small government. A small government would be one that deals withcrucial functions like national defense, cooperation between states,protection of private property and preserving the rule of law.

What do we have now? We have a government that went from spending$20 per citizen in 1800 to over $12,000 per US citizen. We have agovernment that in the 1920s took up about 5% of national income to nowtaking up over 25% of national income. Hmmm?

In this issue:

FORESTForefathers thoughtsDropped offCharting the Forest

TREESHosing saversBreaking upCharting the Trees

DISCLAIMER

To subscribe to this report:

Click here to sign up

In addition to this report you willalso receive Becker Advisory ServicesWeekly Market Commentary.

We will not spam your inbox.Click here for our privacy policy
http://beckeradvisory.com/about/privacy-policy/http://beckeradvisory.com/about/privacy-policy/http://beckeradvisory.com/about/privacy-policy/http://eepurl.com/c3JEMhttp://eepurl.com/c3JEM


2/7

AMERICA IS GETTING DROPPED OFF

Back in 2000 my wife and I spent a year circumnavigatingthe globe for our honeymoon. Along the way we traveled

to India. One morning, while in Delhi, we woke up withthe mission of going to see Humayun Tomb, which is abeautiful, huge, Persian-esque tomb that dates back to 1562.To get to the tomb, we hailed an auto-rickshaw and askedthe driver if he knew the tomb, which is a huge touristdraw. He stated that he knew the tomb and we agreed on aprice. I had a pretty good idea of where we should beheading after having studied the Delhi map the nightbefore. When we turned up at the tomb of Safdarjang Iknew we were at the wrong tomb. The Humayun and Safdarjang tombs are about 2 kilometers apart andat opposite ends of the same road. I pointed out to our driver that he had taken us to the wrong placeand showed him on the map. The driver dismissed my concern and said it would be more money to go

to the correct tomb. After arguing for 10 minutes he just drove away.

I am not sure if this driver was being paid to bring tourist to the other tomb or he just gave up. It is acommon practice for hotels and other attractions to pay taxi drivers (tuck-tuck, rickshaw, etc...) to takepeople to particular places before their actual destination. Either way my wife and I were dropped off atthe wrong place. We now had to decide between bagging the tomb visit, hiring another auto-rickshaw orwalking 2 kilometers in oppressive heat and humidity. We chose the character building walk to the tombversus the risk of another bad drop.

Just as my wife and I were dropped of at the wrong place so too have the markets been taken for a rideand dropped off at the wrong place. QE1 and QE2 were sold as one thing but were later clarified for theirreal purpose and that was to stabilize/lift the stock market. QE1 saw the market lift with little to no

change in the fundamentals of the market. The market was dropped off in the summer of 2010 only to bepicked back up by fall 2010 with QE2. QE2 lifted the markets for sometime and the markets again weredropped off this past June. Since being dropped off at the end of June the markets have gone down. Bothtimes that the market has been dropped off, after a lift from the Fed, investors have found themselves in aworse neighborhood. The current surroundings are 14% of the US populace on food stamps, very seriouscommodity inflation, 9.2% unemployment, a $3.6 trillion dollar budget, an unfathomable amount ofnational debt and politicians fighting S&P about a sovereign downgrade that is completely deserved.

I stated a few months ago that this would be a rough summer if the Fed really did end QE2; So far that iscorrect. The question is will the Fed swing by again to give the markets a lift. If the Fed does offer a liftthe next drop off point is likely going to be an even more unpleasant location than the current one.

At this point the market will either be offered another ride from the Fed or will be left to walk on its own.Neither are particularly good choices. The character building walk is what the economy needs but almostno politicians would vote for it as it would involve immediate pain. Another ride is fine for a while butthe next destination will be interesting. Chances are the Fed will offer a ride again because when peoplefeel poor they do not spend. People still feel poor because home values are still down, unemployment ishigh (rising), and prices are rising.



Humayuns Tomb


3/7

CHARTING THE FOREST

Below we have a map of the jitney driving FED and their pick up and drop off points. Question is whereis the next pick up point?

Below and right we have the Tobin Q ratio which is a ratio that measures the value of the stock market

versus corporate net worth. More easily stated it would be the ratio of the value of the market versus theperceived value of themarket. One very importantpoint to notice is thatwhenever the ratio peaks outabove the mean there is a fall back below the mean of anapproximate equal value.This has been the case untilthe dotcom blow up, thenagain in the 2008 market rout.What can we pull from that

observation? The answer isFed intervention has kept themarkets from their naturaltendencies.




4/7

HOSING SAVERS

Lets pretend you know the couple I am about to describe. Then consider their financial situation andhow they got there. What I am about to describe is pretty much what retirees are facing; the poorer the

retiree the worse the situation.

John and Martha Stewart are 70 something retirees with three grown kids. John is a retired laborer andMartha is a retired housewife. They are drawing $24,000 per year from social security and have a modestportfolio of $225,000. At 70 years old and fair health they are relatively risk averse. At this point they arevery conservative and cannot afford much capital loss. Therefore, they have most of their money in CDs,money market funds and a general bond fund. Before the collapse in the market in 2008 they weregetting 3% in money market, 5% from CDs and 5% from their bond fund. All together their investmentswere paying out about $11,200 per year in income, giving them a total income of $35,000. By no means isthis a lot of money considering they have three grown kids and grandchildren they like to see and treat.One important thing to remember here is that when the vast majority of people save money they give upthings to be able to save.

So, here is John and Martha who worked for years and saved for their retirement. Now, in 2011 theStewarts investment income is $4,500.This is all thanks to interest rates atzero and the Fed pushing bond ratesdown to levitate stocks andaccommodate the Wall Street banksthat created this mess. Not only that, but now congress is looking tomassage their social security cost ofliving adjustment by changing thecalculation of the consumer price index(CPI) to ignore the real inflation that ishappening. Meanwhile, the prices offood, fuel, clothing, insurance, medicalcare, and local taxes have been booming upward due to FederalReserve created inflation. Sure, theStewarts could be pushed out theplank of risk and have to buy stocksfor income. But, they are very riskaverse and do not want to take the riskof stocks, especially now that we face another recession.

The bottom line of this little example is that the ones that suffer the most in this zero interest rate /quantitative easing environment are the savers and risk averse senior citizens. Their incomes havedropped like hot rocks while inflation is eroding their purchasing power. Meanwhile, the Wall Street banksters have paid themselves handsome bonuses in the tens of billions of dollars. To think thatpoliticians are going to do anything to help the average American is laughable. Surely, the Fed and thepoliticians of America will not kill what little recovery we have seen by raising interest rates.Alternatively, they will keep their financial backers happy with low rates, money printing and generouslegislation.




5/7

BREAKING UP

Neil Sedaka had it right in his 1962 song Breaking up is hard to do. The break up I am referring to isthe relationship among different investments. I have been pointing to markets being broken for some

time. In the past few weeks we are seeing proof positive of how the investing world is being turned onits head versus the rules of thumb that most investors have relied upon. There is a break-up between thestock market/US dollar and gold/gold mining stocks. Charts tell the story best so here they come..

To the right we havethe Market VectorsGold Mining ETF(GDX) versus the S&P500. You can see thatin the last market routeof 2008 gold minersand the market went

together. Today we seethe gold minerssurging while thebroad markets drops.

To the right we havethe US dollar versusgold. Note in 2008 asthe dollar rose on safehaven status gold wastaken down (some

artificial suppression).Today as the dollarslides into obliviongold is surging on safehaven status amongother things.

What this shows us isthat in the past wheninvestors ran to thedollar for safe haven status that trade is being replaced by gold. It is safe to say that investors distrust ofthe central planned markets is here and growing. The real irony of todays markets is that since S&P

downgraded long-term US debt the very same long-term US debt has been rising along with gold in safehaven investing. This tells me there are investors that see the writing on the wall and know that the realbubble in the world is US dollars and US treasuries and choose gold. Then there are the folks that aresticking with the old regime and are running into treasuries and fearing golds rise. We all mustremember that gold has not risen for no reason. Gold is rising because the dollar is falling, central bankshave lost control and the globe is awash in debts that cannot be repaid. The music is going to stopeventually and hopefully you are sitting in a gold chair not a treasury chair.




6/7

CHARTING THE TREES




7/7

DISCLAIMERS

Investing involves substantial risk. Becker Advisory Services (BAS) makes no guarantee or other promise

as to any results that may be obtained from their views. At the time of writing Henry Becker and/orAdvisory Services clients holds the following securities that are related to the content of this publicationphysical silver, physical gold, and ticker symbols CEF, GTU, and GDX.

No reader should make any investment decision without first consulting his or her own personalfinancial advisor and conducting his or her own research and due diligence, including carefullyreviewing the prospectus and other public filings of the issuer.

To the maximum extent permitted by law, BAS disclaims any and all liability in the event anyinformation, commentary, analysis, opinions, advice and/or recommendations in the update prove to beinaccurate, incomplete or unreliable, or result in any investment or other losses.

The information provided in the report is obtained from sources which BAS believes to be reliable.However, BAS has not independently verified or otherwise investigated all such information. BAS doesnot guarantees the accuracy or completeness of any such information. The commentary, analysis,opinions, advice and recommendations represent the personal and subjective views of the BAS, and aresubject to change at any time without notice.

The report is not a solicitation or offer to buy or sell any securities.



August 2011 Forest & Trees Report

Documents

Transcript of August 2011 Forest & Trees Report