Thanks for all the bright comments and questions you’ve contributed lately.
Please, keep them coming.
You can share your own comments and questions with me by posting them to the bottom of any article, or emailing them to firstname.lastname@example.org.
Okay, who’s up first this time?
Q [Re: The Case for Spitting into the Wind]: Is it just maybe possible that the Fed is pumping liquidity into the markets to make everyone feel that things are so much better, so they will pile in and keep the markets rising? Hmmm… ~ Steve G.
A: Steve, there’s no “maybe” about it.
The Fed has repeatedly articulated their policy goal of increasing the value of equity assets. A rising stock market is a boon to consumer confidence and lifts pension fund and retirement fund valuations, which, by and by, spurs consumption. The Fed is trying to “prime the pump” by pumping liquidity into the system (meaning giving it to banks). That only trickles down to the real economy after being parked long enough in liquid (tradable) assets like stocks, commodities, and bonds.
Q: Bernanke loans to the big bankers (racketeers) at 0%; they loan it back to Bernanke at 5% and take the difference to pump the market. The only question seems to be, are Americans dumb enough to keep letting Bernanke and the big banks steal the 5% spread? ~ Robert
A: Unfortunately, Robert, most Americans are blind to the racketeering that’s going on. It’s all a neat little game that most folks buy into. I’m talking about the Fed feeding the banks under the guise of floating the economy. The banks love their risk-free investments in government paper, financed by the wave of the Fed’s magic wand over its own balance sheet. Big banks will only lend to consumers at the margin as long as interest rates are so low. Why would they want to lend to consumers on a term basis at these low rates when they borrow the money they lend in short-term markets to fatten their interest rate spreads? They won’t – not to any meaningful degree. That’s why the Fed has to stop doing what it’s doing.
Q: My generation, a debt was a burden until it was paid off. The next generation doesn’t see it that way… debt to them is more a utility that they pay so much for regularly. ~ Niru
A: That’s a brilliant analogy, Niru; I never thought of it that way.
You’re absolutely right. The mindset today is completely different. Debt has become a permanent tool, as an objective, kind of like getting a raise; but you get to spend it all at once, as opposed to spending a part of it when the next paycheck comes.
Q: How will government finance deficit spending in the future when investors have disappeared? … [Greek] investors got a 70% “haircut,” and taxpayers will be forced to pay for expanding credit and their ultimate defaults, in addition to loosing currency value through inflation. ~ Larry
A: That’s a good question, Larry.
The Greek government has to continue to finance ongoing expenditures, which will likely increase as social services are taxed to the max in the face of harsh austerity, and negative GDP growth saps productivity and industrial capacity. In the face of all that, investors won’t lend Greece money unless they are fairly compensated for the risk of doing so. That, too, will add to the deficit and scare off investors.
I can’t see this ending any other way but in a default (again) and Greece returning to a national currency.
Q: Sell the wife and sell the kids, but don’t let go of your silver. ~ Colin A.
A: I’m not a gold bug, nor am I a silver bug. But if I were weighed down with both, I’d hold onto my gold a lot longer than my silver.
Silver is the poor man’s gold, which makes it more likely to be sold off if it’s been bought widely by investors who end up on the wrong side of the precious metals trade. Besides, silver, although it is considered by investors who buy it as a precious metal, as if it will track gold, it isn’t. Silver is an industrial metal, first and foremost, and is better suited to be held when growth is accelerating robustly.
Q [Re: So Far, Not So Good]: We have a “chicken or egg” economy: Homes won’t appreciate till the economy improves; the economy won’t improve till housing picks up. ~ Steve
A: Theoretically, and practically, the economy can grow without the housing market recovering. But eventually, it will reach a flattening-out point until a recovering housing market kicks growth into the next gear.
Not that housing has to do that. Global growth can do that for us domestically, too. The difference is, if housing is firing on most or all of its cylinders, more and more Americans will see their boats rise with the tide.
If we have GDP growth based on exports, without housing contributing, the thing we call “class warfare” will turn into open warfare.
Q: Just curious, you recommended puts on FXI to your subscribers. Wouldn’t buying FXP place you in a somewhat similar situation, but without the time decay of options? ~ Mark
A: That’s true, we would be in a similar position. But, on a percentage basis, I like the options play over the leveraged ETF because subscribers can take a bigger position if they want by buying the options, and generally speaking, I only put subscribers into leveraged ETFs on a very selective basis.
Q: More consumption taxes and less investment taxes is what government should be doing. We need less mindless consumption and more production in the U.S. ~ J.R.
A: I don’t know about more consumption taxes (maybe on some resource-type things that would benefit us all by a properly executed “conservation” tax consideration). But lower investment taxes would be very beneficial. Then again, we have to look at who’s paying what, and who’s capable of paying more.
Q [Re: When Fools Rush In]: High-frequency trading allows the investment banks an absurd advantage over the individual investor, who doesn’t stand a chance against their computers. This allows the investment banks to practice a form of front running, which is supposed to be illegal. Where is the SEC? ~ Bob
A: The SEC has been in bed with the industry for a very long time. They clean the sheets for the banks and brokerages that dirty them. The SEC is a joke.
Q: My son and his wife (mid-thirties) have a mortgage under water and they immediately went back to their bank to apply for refinancing when the new HARP was implemented. He said, if approved, his new mortgage is going to free them with an extra $700 each month. What does this mean for our economy, when all these underwater mortgage holders obtain refinancing under more favorable terms? ~ James
A: It means they can spend the saved cash to pump up consumer spending and the economy again, for one thing. It also means that if they spend it and fall back into trouble on their mortgage and default, the banks won’t have to worry because there are no putback clauses under HAMP 2.0 and the government (taxpayers, again) is backing Fannie and Freddy who are guaranteeing the new loans. It’s a race. If consumer spending lifts the economy and production and creates jobs, we can grow out of where we are. On the other hand, we could be headed right back where we just came from.
Q [Re: The Banks Win, Again]: So that is why Buffett bought so much B of A awhile back… you think he knew anything about this…? ~ Greg G.
A: Buffett is a “protected” investor. He’s an insider if ever there was one. Is he smart? Oh yeah!
Q [Re: It's Time to Make These Two Adjustments]: As a former market maker, I can’t understand why you suggest setting stops. In this market full of manipulators, a stop order seems to be an invitation for some market maker to swoop in, take your stock at the price you set below market the previous day or whenever, then drive the price back up immediately after taking your stock, making a tidy swift profit. I’ve seen this happen over and over, to the point I do not enter stop orders at all. ~ John M.
A: It’s a tough position to be in, John.
I can’t let my subscribers (or suggest that anyone else) remain completely exposed to unlimited losses. I have to advocate stops.
The trick is putting in your stops at a place that isn’t in the “take-out” zone of players who, within an opportunistic window, might try and trigger them. I always recommend putting stops in “strategic” positions, below where they’re likely to get hit and run on. If you’re watching the market all day and have ready access to transact efficiently and quickly, then I agree, you don’t need to put down stops. Still, I would put in some so I have a firewall against disaster.
Q: I have been screening for call option sales steadily for the last month, but have been repeatedly disappointed at the prices paid for those calls. Implied volatility [or IV] values have been crashing for my holdings, making me VERY hesitant to sell those calls. If IV picks up, the value of those calls will increase and my short call positions would go against me. Not a bad outcome if the underlying stocks rise in value, but might cut into my profits on those short calls if the prices of underlying declines rapidly. Based on what happened last year, I do not trust these low IV readings I am seeing. Mr. Gilani, could you give us your view of the prospects for volatility in a future weekly letter? ~ Rick B.
A: You make a great point, Rick, and one that presents a real dilemma. Yes, I will address this in the near future. Thanks for bringing this up on behalf of a lot of other folks who will benefit by understanding the dynamics of volatility and options pricing better.
Q: You write a refreshingly optimistic scenario. What about the July 1 financial “doomsday” stuff? Readers are admonished to hoard bullion coins, hide it in the mattress if need be, because our not-so-bright national leaders intend to take over banks and confiscate private property. One on-line authority predicts digital currency becoming mandatory while another focuses on confiscation of private assets, street riots and martial law. Is there any basis for all this concern? ~ Louise C.
A: Louise, I don’t buy into any of that garbage.
But if I’m wrong, by the way, I wouldn’t be holding gold – it would tank, because there would be no national, liquid market for it. I’d also be stockpiling guns and butter. Seriously, if our government starts confiscating private property, there will be riots and revolution… and I will be one of the revolutionaries.
Q [Re: The Housing Market's Biggest Hurdle, Money Morning, March 23]: You mention that the “putbacks’ were one of the main detriments to fixing housing. Granted, it was one in a plethora of “supply chain’ like problems in the housing market. If I remember correctly, [Franny and Freddie] being able to “putback’ any loans / MBS they had that turned bad to the banks they bought them from was a bad thing. Here it seems that HARP 2.0 no longer allows F&F to do that, but this situation is just as bad. Please explain this. ~ Dom
A: The explanation is simple: It’s a gift to the banks that refinance.
The risk transference to taxpayers through Fannie and Freddie is the only way banks will re-fi and not have to worry about the quality of the re-fi loans. It’s an up-against-the wall move that supposes that good borrowers will be helped, and helping bad borrowers will buy more time to see housing prices rise and float us out of the basement we dug for ourselves.
Putting back bad loans to banks is NOT a bad thing. It is an absolutely necessary and needed thing that helps instill document/appraisal, etc. discipline (to whatever degree). But allowing banks to avoid responsibility for the loans they make is an insane policy (call it moral hazard to the max).
Q: It would be good to know how much of the “personal debt” curve from the last five years was actually small business using their personal credit cards for business loans (at 20% of course). My small western Canadian industrial town was cut off from credit over 15 years ago (bless their dried up little hearts). ~ Ed N.
A: Ed, that’s a question that no-one can really answer. But I am very worried about the implications of both the restrictions on consumers and their access to credit (I’m talking about them using it to further their small businesses) and the loss of equity financing that small business owners pulled from their homes. Without a strong housing market, I fear there will be far fewer small business start-ups and far less American entrepreneurship. That is the very dark side of the future for Middle America.
Q: [I think] we need a constitutional amendment for Crimes Against the People. This could be written to cover elected congressmen and any one whose power and influence affects 100 people. This could be carried out by national poll. ~ Edward B.
A: I’m not sure about the 100 people power thing; that’s too scary to me. But, I agree 100% with the idea.
Q: Maybe I daydream too much, but I heard Shah Gilani say volatility has and is further changing the market landscape, turning people into shorter-term traders, rather than long-term investors. Is this phenomenon something that will erode and go away, like a fad, or, have we, without even really realizing it, been moving through a paradigm shift in investing? ~ Gregory L.
A: Sorry Gregory, you’re not daydreaming; it’s a nightmare and it’s real. There is no going back.
Welcome to the Brave New World, in which finance and trading is the biggest industry in America.