Sex Toy Dave's Financial Outlook

Interest Rates are not part of Fed's Stress test

noreply@blogger.com ("Sex Toy Dave" Levine) — Tue, 13 Mar 2012 00:07:00 +0000

Printing money has more than a thousand year record of wreaking havoc on the economies that try to do it. It is a concern that the US Federal Reserve is not concerned about a chance that its money printing efforts could fail.

The federal reserve is testing the "worst case scenario" on the US banking system but doesn't include a test on what would happen if its interest rate manipulation policy fails.

The Fed is trying to predict what the banking industry will look if S&P falls by 50%, unemployment goes to 13%, housing prices drop 21%, and other economies contract significantly.

Why aren't they testing what would happen if US Treasury interest rates hit 6%? Bank capital mostly consists of treasury securities. Those bonds would drop in price by more than 20%. That sounds pretty stressful.

The Fed feels it can ignore interest rates because it is printing money to buy bonds to keep the rates low. The fed has bought about 3 trillion in bonds since 2009.

Even if the Fed doesn't have to worry about interest rates in the near term, shouldn't we still look to see how strong the economy would have to be for the Fed to stop printing money and manipulating interest rates lower?

Printing money full steam ahead!

noreply@blogger.com ("Sex Toy Dave" Levine) — Fri, 02 Mar 2012 20:49:00 +0000

The market bottomed in August when central banks began printing money quickly again. First the Fed printed loans to the European Central Bank and the the European Central Bank printed money for the European banks. And this was on top of the US central bank buying 800 billion in new US government debt.

This week the market rally paused based on the news that banks will stop printing money. But look for commodity prices to continue their decade long rise as inflation remains higher than interest rates in the US, Europe, and China. This decline in markets may provide an opportunity to buy some more gold.

Note: The central banks do not call their moves "printing money" because they say they are just loaning out the money. But since they loan at zero interest rates and will not force too big to fail banks to pay it back, it is not a real loan.

Another part of the printing machine is that both the US and European bank regulators define government bonds to have zero risk. This allows the banks to take free money from the central bank and then give it to the government in unlimited amounts. Whether they call this game of smoke and mirrors QE3 or monetary stimulus, its still nothing more than good old government printing to keep the current leaders in power.

This printing may work long enough to re-elect most of the current leaders in the 40 or so elections world wide in 2012. But watch out for 2013 and 2014 though . . . its gonna get ugly!

My portfolio was up 10% in 2011

noreply@blogger.com ("Sex Toy Dave" Levine) — Wed, 04 Jan 2012 23:45:00 +0000

Sorry this is hard to read, but my portfolio is Green and S&P 500 is Blue. I was up over 10% and the S&P was flat. Most of my gains came from holding gold most of the year and selling a bunch at 170. I also did well by buying Google a few times under 500 and selling it a few times over 600. And I also simply held a lot of Google which overall outperformed.

Set up a bank account in Gold

noreply@blogger.com ("Sex Toy Dave" Levine) — Wed, 02 Nov 2011 23:59:00 +0000

The original constitution had a provision that stated, "the legistature of the United States shall have the power to borrow money and emit bills of credit." Alexander Hamilton, who became the first Treasury Secretary of the United States, told a majority of the delegates "to emit an unfunded paper as the sign of value ought not to continue a formal part of the constitution, nor ever hereafter to be employed; being in its nature, repugnant with abuses and liable to be made the engine of imposition and fraud." Hamilton won the removal of that term from the constitution. Then later as Treasury secretary, he set up the first US Mint and backed the new currency with gold and silver. This set off the greatest economic boom in world history and soon became the most valued currency worldwide.

In 1972, Nixon took the US currency off the gold standard. As a result, the currency declined in value rapidly, and the economy suffered job losses, slow growth and depressed financial markets. In 1981 Reagan got interest rates up to over 14% in order to stop the printing presses. But from October 2008 to October 2011, the Federal Reserve printed 2 trillion dollars. The Federal reserve's printed money increased by over 300% from 800 Billion to now almost 3 trillion. Bernanke, US central bank chairman says the bank will continue to print more money. (Fed printing stats from: Wall Street Journal)

The average life expectancy for a fiat currency is 27 years, with the shortest life span being one month. Founded in 1694, the British pound Sterling is the oldest fiat currency in existence. At a ripe old age of 317 years it must be considered a highly successful fiat currency. However, success is relative. The British pound was defined as 12 ounces of silver, so it's worth less than 1/200 or 0.5% of its original value. In other words, the most successful long standing currency in existence has lost 99.5% of its value. (Quote from: Washington's Blog) From 1972 to 2011 the dollar has lost 72% of its value. (dollar value calculator)

Gold has been a world wide currency for over 2000 years. Washington politicians will tell you that gold is a risky investment while the US currency and US Government debt are "riskless". Meanwhile the US dollar continues its decline while gold has increased over 800% since 2001. This beats the government backed bank's savings rate of less than 1%. Gold can be volatile, but if you buy on dips and sell on up trends, you can use that volatility to your advantage.

My suggestion is to open up an account at Etrade and keep your "savings" account in an ETF called GLD. And keep your checking account as a "Cash credit" that is not put in money markets. You can use the Etrade account without ATM or checking fees or monthly fees. The only cost is the buying and selling of gold at about $8 a trade.

Bernanke will eventually print money and give it to European banks

noreply@blogger.com ("Sex Toy Dave" Levine) — Wed, 13 Jul 2011 21:12:00 +0000

European governments are going to have to default on their debts.
There is no way they will get everyone to agree and with enough speed to print all the money they will need to to bail out Spain and Italy.
Since most European bank capital is based on European government bonds which are considered solid investments, once those governments default, European bank's capital becomes junk and the banks go bankrupt.
Since many US banks are intertwined with these European banks, this will further effect US banks.
Thus, shortly after Europe defaults, Bernanke will print more money and give it to the European banks in order to keep the banking system afloat. This will likely result in a stock rally and another great burst of inflation.

US government debt is officially not "riskless"

noreply@blogger.com ("Sex Toy Dave" Levine) — Tue, 19 Apr 2011 21:29:00 +0000

David Beers, global head of sovereign and international public finance ratings at Standard & Poor's says he rejects the thesis that a government with a central bank that has the ability to print money does not remove the risk of default from that government. For if it did many governments throughout history would have printed their way to riches.

The S&P stated that they may downgrade US debt ratings. This statement formalizes the idea that US government debt is not "riskless" as it is so often defined. In today's world where people accept bizarre philosophies such as "Too big to fail" and persistently ignore the law that you can't spend more than you make; this S&P statement is surprisingly informative to many people around the world.

This US credit warning is a bigger deal that people may realize. For 30 years, markets have labled US debt as "riskless" and based many other debt prices off that zero risk interest rate. Now that US debt officially is not "riskless", rates based off US treasuries need to be re-priced. This is similar to why so many investors are afraid of Greece defaulting. A Geek default is a relatively small amount of money, but the fear is that investors begin to price in the idea that western governments in general can default. Government debt being considered the safest investment or in some cases "riskless" is well ingrained in the foundation of our financial system, and political leaders are hoping they can maintain the myth for as long as possible. This S&P warning about the US debt problem makes this myth harder to maintain.

I have that strange feeling again . . .

noreply@blogger.com ("Sex Toy Dave" Levine) — Sun, 30 Jan 2011 02:27:00 +0000

In 1995 i wondered . . . should I buy sextoys.com OR sextoy.com?? Each cost $70 and I didn't want to waste my money. I tried to asses the value of the domain and although I decided to only buy sextoy.com, somehow I had this strange feeling that sextoys.com was worth not only more than $70 but somehow, much much more. but it was all so new and inexplicable, so I passed on the purchase. Now its easily worth 1 million or more. I hope not to make that same mistake again.

I have the same feeling about gold . . . or more specifically about the impending peril on the US government's financial situation or the dollar itself. This video helps understand what we are not able to visualize.

Do not buy TBT to short US treasuries!

noreply@blogger.com ("Sex Toy Dave" Levine) — Thu, 20 Jan 2011 06:13:00 +0000

If you want to short US treasuries many people recommend the double short ETF TBT. I have been watching that ETF closely and if interest rates stay even, you will lose 20% on TBT! A much better way to profit is to sell long term naked calls on TLT or simply short TLT.

quantitative easing explained

noreply@blogger.com ("Sex Toy Dave" Levine) — Thu, 18 Nov 2010 15:29:00 +0000

This video is great. The only thing I don't agree with is the characterization of Goldman Sachs as an evil corporation. The Federal Reserve buys treasuries from Goldman rather than directly from the Treasury because the Fed is incompetent, but Goldman can't be criticized for taking the Fed as a customer. If the Federal reserve came to you as a huge customer who wants to buy 600 billion dollars of investments, would you say "no, do it yourself"? Of course not!

Quantitative Easing is fancy new term for "printing money"

noreply@blogger.com ("Sex Toy Dave" Levine) — Mon, 01 Nov 2010 00:49:00 +0000

Suddenly a new term "Quantitative easing" has been created and is on TV every day, but is "Quantitative easing" really something new? The proper economic term for QE is "monetizing the debt" and the more colloquial phrase is "printing money".

There are a few reasons central banks don't use the term "printing money".
#1 - The central bank does not actually have to print money, they just create digital credit in a computer and give it to banks.
#2 - All central bankers learned in banking class 101 that printing money is bad for the currency and the economy that uses that currency.

There is one reason that central bankers don't use the proper economic term "monetizing the debt"
#1 - All central bankers learned in banking class 101 that monetizing the debt is bad because it creates inflation which is bad for the economy and for the currency.

So if printing and monetizing is bad, why is the central bank doing it? They are doing it for the same reason that all governments who had a currency not based on gold have printed money for centuries. They have run out of money and don't want to pay the price of default. It is much easier to steal from the productive people in society who trust the currency than to reform and restructure debt.

"Central banks" were separated from the government for the sole reason to prevent this recurring tendency of governments to ruin its economy by printing money and giving that money to itself or struggling friends. Thus, central banks were given independence from government with a priority to keep the currency stable (ie. no printing allowed!)

The US central bank wants to print money but they can't say "I want to print money". Nor will intellectuals allow them to say "I plan to monetize the debt." Instead they created a new term which makes it seem like they are doing something new that has a chance of working. We are told that all of our bad debts can be washed away with this new inventive process called QE!

Sorry . . . printing money has never worked and never will. And putting a fancy name like "quantitative easing" on it won't increase its chances for success either.

Chinese inflation of 15-30% within 6 months

noreply@blogger.com ("Sex Toy Dave" Levine) — Wed, 14 Jul 2010 03:09:00 +0000

Over the last month, I read several reports about how some chinese factories are raising prices or wages on US manufacturers by 15-30%. Then I was at the Adult Product Manufacturer convention (ANME) and I heard from several American sex toy manufacturers who work with chinese factories and are planning 15-30% price increases coming in the next couple months due to rising prices in China.

Thus, I am betting that the market will recognize significant inflation in China. Inflation is bad for the US and Chinese consumer. If China lets its currency appreciate, that will hurt the US consumer, but will help the Chinese consumer. Boosting Chinese consumer demand is the stated policy of China and the US and will help trade imbalances in the long run.

When the inflation news comes to the market, US consumer stocks will decline. (short XLY) It will also hurt chinese stocks thus I suggest continuing to avoid them for now, but eventually the Chinese will figure out the correct move is to increase the value of its currency. Shortly before a significant revaluation will be the best time to buy a chinese consumer stock play like HAO.

I hope Peter Schiff wins in CT for Senate

noreply@blogger.com ("Sex Toy Dave" Levine) — Wed, 09 Jun 2010 00:04:00 +0000

Currency should be based on banks not governments

noreply@blogger.com ("Sex Toy Dave" Levine) — Sat, 29 May 2010 19:00:00 +0000

The European Central bank should base its currency on banks and not governments. The ECB should now look for major banks in each European country to back and support in order for the Euro to remain a viable currency in each country. Then they support those banks right now if necessary, but set up higher capital requirements for all banks that use its Euro going foward. And if all banks in a particular country are not even worth helping, then they must let those go.

There is no reason for the ECB to care if a government defaults nor should they worry about employment or any other issue other than the stability of its monetary value against gold, its currencies wide acceptance, and the health of the banks that hold accounts in its currency. Concerns regarding employment, health of governments, and even price stability (other than against gold) are all ploys by governments to increase their power and steal from the people.

china is gonan get screwed out of its savings

noreply@blogger.com ("Sex Toy Dave" Levine) — Wed, 26 May 2010 19:16:00 +0000

I heard a report on the news that actually said, "Market rallies as China says it is 'All in' regarding European Bonds." Actually all China said is that they are not planning to sell their bonds. All in would imply they are going to bet all their money on Europe.

The bottomline is that China is screwed. You may have heard the saying: If I owe you $5000, I have a problem, but if I owe you 5 million, you have a problem.
That is the story with china. Europe owes about 750 billion and the US owes 1.5 Trillion. China will be lucky if they get 50% of that back.

The question is, do they realize they are getting screwed and secretly trying to prepare to get out this mess with as little loss as possible? Or are they as they seem in the news reports, actually believing that promises from Western governments are worth their weight in gold when they are actually only worth their weight in paper?

European governments will Default

noreply@blogger.com ("Sex Toy Dave" Levine) — Sat, 22 May 2010 17:31:00 +0000

The big question on every investors mind is will the western governments print their way out of their debt crisis or will they default. If they can inflate their way out, the politicians and bankers who got us into this mess stay in power and can pretend nothing is their fault. If they default, the politicians and bankers lose their job and many will go to jail, and most importantly responsible profitable efficient organizations, individuals, and banks that remain solvent will rise in power.

Regarding investments, knowing this outcome is extremely important, because if we have inflation, you want to own commodities, stocks, and homes as they will hold value against a declining currency and there is no reason to pay off debts because they will get inflated away. On the other hand if we have default, then you only want to own what you need, invest in solid investments, and limit your debt.

Here is my prediction on what will happen:
Europe will default. The main reason is that the German’s understand too much about the evils of printing money from their nazi days. And they stand to benefit as the last country standing. Also, where as the US government in 2008 constantly over funded any threat, the European response has been to do as little as possible as late as possible. The markets smell blood and there just doesn’t seem to be a enough money or will for the Europeans to bailout all the governments suffering in this debt crisis.
Once this default occurs, BUY Europe and own the euro.

The idea that bailouts save a currency is absurd and counterintuitive. A currency’s value is nothing more than the amount of currency outstanding vs the amount of economic value it covers. Thus if an economy declines and they print money, the currency declines in relative value. If they don’t print and the economy declines, the currency could still decline as the economy declines, but by less than if they printed. But by not printing the currency should hold its value against gold. Then, holding value against gold will gain trust and that trust will further increase its value.

Don't use CYB to be on the chinese currency

noreply@blogger.com ("Sex Toy Dave" Levine) — Wed, 27 Jan 2010 21:21:00 +0000

There is an ETF called CYB that is meant to track the value of chinese currency Yuan. Unfortunately, it does not work. The Yuan is up, but this currency is down!

The Bubble continues to inflate!

noreply@blogger.com ("Sex Toy Dave" Levine) — Wed, 13 Jan 2010 06:48:00 +0000

The bubble continues to inflate as stocks, commodities, and gold continues to rise and faith in government loans remains strong.

How long can this continue?

Inflation or Deflation?

noreply@blogger.com ("Sex Toy Dave" Levine) — Tue, 10 Nov 2009 21:22:00 +0000

The argument for inflation is that that fed is pumping money into the system and that money has to go somewhere . . . thus it will run up prices. The Fed increased their balance sheet by 1 trillion as well as lowered interest rates to 0% so that banks can borrow to create more money on their own. An additional inflationary source is the government debt. Since US Treasuries are considered "riskless cash equivalents", when the US borrows an additional 2 trillion dollars, that acts as more money pumped into the system.

The risk for deflation on the other hand is even greater, but so far, at bay. The US government owes trillions of dollars and is guaranteeing trillions more on financial firms balance sheets. If interest rates rise, if the Chinese stop lending, or if bank losses increase, it is possible the US government will default on its debt. A default by the US government would turn its trillions of Treasury bonds from "riskless cash equivalents" into "junk" or worse. If this happens, tons of money immediately gets sucked from the system and we have severe deflation. This is why the dollar increased in value and all prices dropped when banks were failing and defaulting in 2008 and early 2009. When the government stepped in and turned all those problems in "cash" by guaranteeing it, the deflation stopped.

Since the government does not want to default and be forced to reform, they will try their best to inflate our way out of this mess. The Fed is supposed to defend the value of the dollar, but I wonder if it really came down to it if they would allow a government default.

So what to do? For now, it is OK to bet on stocks and commodities that benefit from a declining dollar, but we should pay close attention because if this inflationary party stops, it will stop quickly and end very badly. Keep one foot on the stock market gas, and one foot our the door ready to leave the party and pay off all debts if the whole ponzi scheme starts to collapse.

Sovereign government defaults will rise rapidly this year. Even the US government is at risk.

noreply@blogger.com ("Sex Toy Dave" Levine) — Thu, 19 Mar 2009 03:57:00 +0000

Today Obama tried to give support to his Treasury Secretary by saying, "No Treasury secretary since maybe Alexander Hamilton has faced such challenges." Funny he should mention Hamilton, because Alexander had a quote regarding our current situation that we are in today. The original constitution had a provision that stated, "the legistature of the United States shall have the power to borrow money and emit bills of credit." Alexander Hamilton voiced the majority of the delegates who won the removal of that term from the constitution. Hamilton said,"to emit an unfunded paper as the sign of value ought not to continue a formal part of the constitution, nor ever hereafter to be employed; being in its nature, repugnant with abuses and liable to be made the engine of imposition and fraud." He was saying that currency backed by nothing more than a government promise is prone to corruption. Later Hamilton became the first Treasury secretary of the United States. He set up the first US Mint and backed US currency by gold and silver. This set off the greatest economic boom in world history.

In 1972, Nixon took US currency off the gold standard. The currency then suffered terrible inflation and Nixon found himself in jail on other charges. Leaving the gold standard made the US dollar a fiat currency. Fiat currency (fiat money) is money that exists because an authority or custom declares it to be money. As Hamilton alluded to, the history of fiat currencies is not pretty.

Just this year the US will issue 2.35 Trillion new treasuries and Europe will have to issue even more! Japan and China already own 65% of all US treasuries. Meanwhile Japan is out of money and China is spending what it has as both economies implode. Since 1830 there have been 4 bursts of sovereign government debt defaults. 1840 and 1940 both saw 50% of soverign governments default at once. The other two events were both over 40%. In arguably the worst financial crisis in history, we currently are seeing only under 20% of governments in default. The debasement of fiat currencies and government defaults will rise rapidly over the next year. Even if the US does not default, it will at least have to devalue its currency to pay for all its obligations.

The investment strategy for this situation is to own real things with real value. No matter what is happening with currency, people will find a way to trade something for breakfast, lunch, and dinner. Own companies (stocks), that are creating a real profit selling real products that people want. These companies also must not have a need to borrow money for the next several years.

Real estate will also hold its value. The roof over your head has real value and the land a building rests on, also has value. Especially now that prices have come down significantly, there should be good real estate deals that will hold value against a declining currency.

Commodities famously hold their value in times of fiat debasement (inflation) because people need the basic building blocks of our lives like oil, sugar, and copper regardless of what is happening with currencies. Companies that are producing these commodities efficiently can also have value. Deep sea oil driller Transocean (RIG) is my favorite.

Everyone is running to gold (GLD), but silver (SLV) may hold better value. Since 600 BC Gold:silver has traded 15:1. Similarly there are 15 parts of silver to every one part of gold in the earth's crust. This ratio started to climb in the 19th century but was back to 15:1 as recently as 1980. It is now trading 70:1.

The Fed today announced that it is going to buy up to 300 billion longer term US treasuries over the next year. That is good if you like inflation, but barely scratches the surface as it is only about 10% of the money the government seeks to borrow. Whether it is inflation or higher interest rates or outright default, treasuries record low interest rates are in a precarious position. Famed investor Warren Buffet said February 28, 2009: "When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s," he went on. "But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary." If you are bearish on US treasury bonds buy the 10 year double short ETF ticker TBT.