November econ newsletter_lvrec

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November econ newsletter_lvrec

  1. 1. • The Republicans made huge gains in the recent elections. What does that mean to investors? Is Obama now a Lame Duck President? • The Feds announced another $600 billion spending spree on 10-year government Treasuries. What does that mean for stocks and gold? • The housing market still shows no sign of recovery with the latest drop in listing contracts. • Unemployment numbers came in better than expected. Strong job numbers may actually send the markets downward. How is this possible? • The currency war is well underway and if it escalates this will be bad for the global community. • What is the outlook for gold in the near and long term? • Are stocks overvalued at this time with the recent huge run up in stock prices? • U.S. banks are facing hundreds of billions in lawsuits. Will new laws lobbied by Republicans save them? • We have many Canadian subscribers, so of course I will also provide updates on what is happening in Canada as well as discussion on the next economic Superpower China. • Finally, we have to discuss what investors do in this current environment to maximize returns or prevent losses. “The reason that stocks soared is the U.S. dollar dropped - and stocks almost always rally when the U.S. dollar drops – this is because stocks become cheaper to international purchasers.” “As further positive news for Gold Bulls, Goldman Sachs announced the Fed could end up spending up to $2 trillion of additional stimulus.” Mike Lathigee President Las Vegas Real Estate Club U.S. Politics Affect Global Economic Moves issue: NOVEMBER 2010 $59.97 So much has happened since last month’s economic update. Here are just a few things that I will discuss this month: An integrated approach to nurturing your wealth and achieving your financial goals. Inside This Issue: Economy Report Las Vegas Real Estate Club PAGE 2: Election Results May Stall U.S. Forward Motion PAGE 3: More Quantitative Easing from the Federal Reserve PAGE 4: Housing Weakness Continues in Face of Foreclosure Moratoriums And Much More...
  2. 2. The midterm U.S. elections showed there was a stark voter rejection of President Obama last week. Republicans seized control of the House of Representatives winning 60 seats, which is the largest swing of seats since 1948. The Republicans also gained six seats in the Senate, however, the Democrats still remain in control of the Senate. I am not optimistic about seeing cooperation between the partisan groups, because in the House of Representatives 60 people with strong ties to the Tea Party were elected, and I believe that those in that party with extreme right wing views will have no interest in cooperating with the Democrats. As a result, we may be looking at American politics where very little gets done due to constant partisan bickering over the next 2 years. This is of grave concern given America’s deep economic problems coupled with the dilemma of Afghanistan and Islamic terrorism. Unfortunately, the American system of democracy allows such a situation to occur where we may see two years where Democrats and Republicans will not cooperate and very little gets done. Meanwhile, China will continue its forward progress. Its one party government focuses constantly on progress as opposed to the U.S.A., which is caught up in moving political agendas forward rather than moving the nation’s economy forward. In the past, I have discussed in lengthy terms the flaws in a democracy that gives a competitive advantage to other countries, such as China. For example, in the United States important decisions are made based on how they impact the two and four year reelection cycles of the party in power. This means the people in government make policy decisions based on what will get them reelected rather than on what is best for the country over the long term. In China the ruling party is able to make decisions based on what is best for their country over a much longer period of time – even 50 years or more. This has proven to be a huge advantage to China as it continues its journey to becoming the next Superpower. Remember, China’s economy continues to grow every year by double digits, while the U.S. is looking for GDP growth of less than 2% this year. This is a worldwide trend as many emerging nations are experiencing double digit growth while Western nations are doing little better than a few percentage points. In America we are experiencing a slow recovery, while many countries in the world are having an economic boom. One possible advantage Obama may gain from the perceived extremism of some new Tea Party members in the Republican Party, may come from the fact that they may make Obama appear to be the only calm and rational option in the 2012 elections especially if Sarah Palin is the one running against him. (unlikely but possible) It is because of these perceived radical Republicans that I am of the opinion we are looking at a Lame Duck Presidency for the next two years. There is no way the newly elected Tea Party politicians will agree with any vote that increases the debt or increases the size of government. This is because Tea Party Republicans want to see government spending cut and the debt brought under control with less government intervention. If we start to see Obama move in this direction, due to the fact that he will need to start making deals with the Republicans, then we will see a possible rise again in the U.S. dollar and a drop in gold prices. This happens because gold prices rise as the U.S. currency becomes devalued. Inversely, gold prices fall as the U.S. dollar rises. Policy changes that move towards controlling the debt will cause the U.S. dollar to rally and as the U.S. dollar becomes stronger, then gold prices will fall. Also, as the U.S. dollar becomes stronger, U.S. stock prices will decline. In addition, the Obama Administration has cooled down its rhetoric about raising taxes on the rich. Obama will now need to reach out to Republicans and find a middle ground that does not attack high income earners. These are just some of the key developments investors want to watch for in light of the recent elections and its sweeping Republican victories. For instance, the bank stocks have been rebounding since election night. This is because the market perceives that with the Republicans in a much stronger position we will see new lobbying for legislation to protect the banks. The big losers in this recent election have been carbon emission capture companies and there will be no Green Capture Tax. This is a sector that all investors should avoid. grow. protect. invest. Election Results May Stall U.S. Forward Motion “This is a worldwide trend as many emerging nations are experiencing double digit growth while Western nations are doing little better than a few percentage points. In America we are experiencing a slow recovery, while many countries in the world are having an economic boom.”
  3. 3. More Quantitative Easing from the Federal Reserve “The economy is in its present state because individuals spent beyond their means and governing institutions allowed them to do it. The Feds believe that keeping interest rates low will stimulate borrowing and will help avoid the continuing economic slowdown.“ In addition to the momentum caused by the election, stocks soared on the news of the Fed’s $600 billion buy back of 10-year Treasury Notes. The Fed reasons that such a move will keep interest rates low to allow more time for the economy to recover. At the same time, the Feds will be creating more demand for their U.S. Treasury Notes and interest rates will not have to be increased to attract buyers. So, the Fed announced that every month it will buy $75 billion in U.S. Treasury Notes to keep interest rates low. This is now referred to as the “Quantitative Easing 2” Program. But what really sent the market soaring was the Fed’s announcement that they had the option to repeat this process. Thus we may be looking forward to a “Quantitative Easing 3” Program if the recovery is not fast enough. The reason that stocks soared is the U.S. dollar dropped - and stocks almost always rally when the U.S. dollar drops – this is because stocks become cheaper to international purchasers. Investors liked the Fed’s announcement, because this Fed policy locks interest into lower rates for a protracted period of time and gives the U.S. time to recover. The Feds did this because of the elections last week. They expect the Democrats and Republicans to be in gridlock, so they are taking economic matters into their own hands. The economic recovery has been too slow for the American public in terms of output and employment. Therefore, the Federal Reserve made a unilateral decision that a new stimulus is the best bet. The reason this announcement came so suddenly is because Bernanke is sure that with the Republicans controlling the house it was unlikely that another stimulus program will ever be passed. So, the Central Bank simply will simply print and inject another $600 billion of money into the system and buy long-term treasury bonds in the market. The economy is in its present state because individuals spent beyond their means and governing institutions allowed them to do it. The Feds believe that keeping interest rates low will stimulate borrowing and will help avoid the continuing economic slowdown. When the Feds made this announcement gold surpassed $1,380 an ounce and silver hit $25.50 per ounce, this is a 30-year high for silver. Precious metal bulls believe that more bond purchases by the Fed are aimed at driving up inflation and will weaken the U.S. dollar, which will lead to higher consumer prices. All of this increases gold’s appeal as an inflation hedge and an alternative investment to the greenback. As further positive news for Gold Bulls, Goldman Sachs announced the Fed could end up spending up to $2 trillion of additional stimulus. Given the current wins of the Republicans I disagree, but this announcement also created more upward momentum in the stock markets.
  4. 4. Housing Weakness Continues in Face of Foreclosure Moratoriums “The economy is in its present state because individuals spent beyond their means and governing institutions allowed them to do it. The Feds believe that keeping interest rates low will stimulate borrowing and will help avoid the continuing economic slowdown.“ News on the housing front continues to look grim as the number of people who signed contracts to buy homes fell in September after two months of gains. This is possibly fallout from the foreclosure moratoriums, which have disrupted activity in the housing market. Last Friday, the National Association of Realtors said sales agreements for previously occupied homes dropped 1.8% in September. The setback highlights the continued problems facing the housing industry as it struggles to mount a recovery from the worst recession since the Great Depression. It is very likely that some of this September weakness is caused by moratoriums imposed by banks on mortgage foreclosures. Banks halted tens of thousands of foreclosures as they investigated allegations that some foreclosure proceedings had involved flawed legal documents. This weakness in the housing market is yet another reason for the Fed’s announcement to use $600 billion to purchase 10-year Treasury Notes as a method to keep interest rates low. The number of deals going to contract will continue to fall as worried banks continue to slow down or stop foreclosures. If the lawsuits against some of these banks are successful we could see them collapse. For example, Bank of America has $375 billion in lawsuits against it, which would bankrupt the bank. This year we are holding an event called the Global Economic Outlook Summit. This Summit will host several top financial forecasters and economists from all over the world. The theme of the Summit is to understand what is happening in the world and what people should do at an individual level to protect themselves, as well as what action steps they can take to make money for themselves. This Summit replaces our traditional Investfest event. Tickets are $997 and if you buy a ticket your spouse or business partner can come with you for free. This offer expires November 15th. If you would like to purchase a ticket simply send an email to education@allianceinvestor.com and we will send you back an enrollment form. Those who currently have Investfest tickets will still be able to attend this event without paying the additional charge.
  5. 5. Besides watching the housing market, the other key economic indicator that I watch closely is unemployment. I remain of the opinion that it is impossible to have a jobless recovery and have been saying that since the U.S. fell into this deep recession. So, on the employment front we do see some good news. During the month of October the U.S. added 151,000 jobs, which is more than double, and nearly triple the expected 65,000 jobs for that period. Also, September’s employment figure was revised to show a smaller loss in jobs. September’s numbers moved down from 95,000 jobs lost to only 41,000 jobs lost. It was the first positive hiring month since May of this year. Now, I want all my subscribers to be aware of a very interesting theory that may or may not prove true. That theory is that if we continue to see continued job growth in the United States this could actually be bearish for both gold and stocks. Here’s the reasoning behind my theory. The Feds are going to spend $75 billion a month buying 10-year Treasury Notes. However, if they start to see economic recovery and job growth then they will stop this stimulus and we definitely would not see a Quantitative Easing 3 program go into action. An economic recovery would lead to a stronger U.S. dollar and thus cause gold and stocks to drop. The market right now is rallying almost entirely on the basis that the U.S. dollar will continue its sharp decline. The largest holder of bond funds on the planet, Pimco, stated that the U.S. dollar would drop another 20 percent. If the announced job numbers had been bad we would have seen the U.S. dollar fall further and stocks and gold surge up even further. There have been international consequences to a dropping U.S. dollar. On Friday the Canadian dollar actually was above par to the U.S. dollar. It was only a few months ago during the Greek Debt Crisis that we were concerned about the collapse of the European Union and the Euro. Now the Euro is at $1.43 against the U.S. dollar. Of course, all of this is causing higher prices for food and energy. For example, last week oil hit $86 a barrel and does not look like it will slow down on its climb to $100 a barrel. The Pending Trade and Currency Wars But of course the side effect of all this action is the development of currency wars. Tensions are growing in the global currency markets as political rhetoric heats up and countries battle to protect their exporters, raising concerns about potentially damaging trade wars. At least half a dozen countries are actively trying to push down the value of their currencies. Japan is the most active, having seen a 14 percent increase in its currency value since May. In the U.S., Congress has been considering a law that targets China for keeping its currency artificially low and in Brazil, the head of the central bank said the country may impose a tax on some short-term fixed income investments, which have contributed in a rise in that country’s currency. As countries around the world continue their struggles to recover from the global financial crisis, worries are mounting that policy makers in these countries could become more aggressive in protecting their nation’s business interests. In fact, “protectionism” is a very big concern and with the U.S. election over, the focus may be back on a pending international currency war. In one bold move the Japanese government sold $20 billion worth of its currency in one day to push its currency lower. Other countries such as Taiwan, South Korea, Thailand, Brazil, Colombia, and Peru are taking similar steps. In the U.S. the focus of the attack is on China, which it says is keeping its currency at artificially low levels in order to boost its exports. I believe the currency war will be led by Brazil, because of its upcoming elections. The major issue in that country is the fact that its strong currency is hurting its ability to compete. This is an issue I will closely monitor. grow. protect. invest. Better Than Expected Employment Numbers “The market right now is rallying almost entirely on the basis that the U.S. dollar will continue its sharp decline. The largest holder of bond funds on the planet, Pimco, stated that the U.S. dollar would drop another 20 percent. ”
  6. 6. I am sure that my many subscribers, who have listened to me over the years, now understand why I guided investors buy heavily into gold at $300 an ounce. I repeated this guidance to buy gold many times long before gold experienced the current frenzy and buying mania. In all cases this is something I stated you should definitely had to discuss with your licensed financial advisor. Many of you profited hugely from this strategy of buying early on and so you deserve congratulations. Unless we see a change in U.S. policy that pays down the debt and curbs stimulus programs the U.S. dollar will continue to collapse and gold and stocks will move higher. However, if we see unemployment rates improve and the U.S. dollar grow stronger then the Feds may reverse their thinking on a Quantitative Easing 3 program and may even call a stop midway through the Quantitative Easing 2 program and its $600 billion stimulus. This would see an end to the bull market on gold prices and a huge short term correction in stock prices. If the economy continued to see improving indicators then the markets would continue to move up over the long term based upon strong U.S. economic fundamentals and not simply the result of the teeter-totter relationship that sees the market move up because the U.S. dollar moves down. So, for the most part I remain bullish on a continued run up in stocks and gold, but this can reverse course if we see improving job numbers and a recovery in the U.S. dollar. If we see the economy improve the Feds will not have to take action with additional Quantitative Easing and this would send gold prices downward. On the other hand, if the economy continues to see stagnant growth and the Feds take additional stimulus action, then we will see gold soar to much higher levels. As investors we must watch what happens in the macro markets. We have to be tuned into the market indicators. As I’ve explained, there are arguments the support gold going either way, either to higher levels or to lower levels. It is ultimately up to each one of us to follow what is happening, and up to each one of us to be accountable for our response to what is happening. That is why I give these monthly updates. We are seeing complex relationships become even more complex. That is why I encourage you to – at the very least - tune in each month to follow what is happening and learn the likely impact of events on your investing decisions. Understanding How Macro Economics Impact Micro Economics For those of you who want a deeper understanding of these complex issues, I am holding a one-day economic boot camp on December 10th in Las Vegas. The purpose of the day is to focus on global economics and based on what is happening in the world I will discuss what are your options that you should discuss with your licensed financial advisor about your own portfolio. The one-day boot camp will discuss macro economics and use Las Vegas as a case study about what happened during the recent financial crisis. The morning will start with a tour of Las Vegas and what is currently happening in the city to Real Estate values. The day will end with a tour of a specific Real Estate Project. Tickets to the tour are $197 each and include a gourmet lunch. If you would like a ticket send an email to education@ allianceinvestor.com and we will contact you with details. The Inflation Elephant in the Living Room One major problem that I see possibly happening that no one is discussing right now is the potential for soaring inflation. Everyone knows that the best offense to rising inflation is raising interest rates in defense. But if we see inflation start to creep up, and the Fed can’t raise interest rates due to other circumstances, then the bond market will collapse. For example, no one is going to buy a bond paying 3% if inflation is at 3.5%. This circumstance would make it impossible for the Feds to sell Treasury Bonds. Thus the Feds would be forced to raise rates in order to fund the debt by selling the treasury bonds at higher interest rates to attract buyers. This potential situation is not getting much attention, but much higher interest rates could derail any economic recovery in progress. If we see rising inflation then it will be impossible for the Feds to implement any Quantitative Easing program and the result will be an end to any quick economic recovery. grow. protect. invest. Gold Again, Again and Again “So, for the most part I remain bullish on a continued run up in stocks and gold, but this can reverse course if we see improving job numbers and a recovery in the U.S. dollar. “
  7. 7. As I was thinking this month about the economy I was struck by the idea that temporary Bull markets make geniuses of many people in their own minds. Yet, there are always circumstances that can change, and those altered circumstances can cause other things to transform very quickly. I guess my point is that today’s genius might have been yesterday’s pariah, and vice versa. For example, there is one individual I call a Talking Head, who is always on television promoting why gold is going much higher. He manages a multi-billion dollar fund and is a former speaker at Investfest. However, before the recent gold run his fund was down dramatically and investors lost a fortunate with him. At that point in his career he was not a friend to many investors. Yet, now we’ve seen gold skyrocket and he has turned into an icon of success and is on the media everyday. Now, I know him to be a smart guy, but I feel he never gives a balanced answer on the fundamentals of gold and only talks about why gold prices are going higher. I think investors need all the information, not just one side of the story. Still, having access to all the information doesn’t necessarily mean we use it. Here is another example of what I mean. One widely followed Economist, who has been wrong many times in terms of the guidance he gives, is former Chief Economist for Merrill Lynch David Rosenberg. Now, a lot of people listen to Mr. Rosenberg, yet part of the problem I find with his guidance is that he is too focused on the United States. When doing his analysis he does not look far enough. He does not look at what is happening in other economies. For instance, seven weeks ago he recommended that people sell all stocks. And of course, we’ve seen the market perform well in those seven weeks and is up almost 15%. The reason I even mention this is remind you that even high profile economists can give the wrong guidance. Rosenberg has done it many times, so don’t be too hard on yourself when you are wrong. Are Stocks Overpriced? Stocks have seen an impressive run up over the past seven week and investors are wondering if stocks are now overpriced. I would say, “Not really.” The reason I say this is because earnings of major companies have also soared and the Price Earnings Multiples are still low. If you are in stocks take some profits, but you can maintain a healthy position as long as we see the Feds policy of keeping interest rates low and forcing the dollar downward is still in place. The United States is No Longer the Center of the Economic Universe In the U.S. we are seeing a few key economic indicators that are positive. Manufacturing numbers have improved and retail sales have remained steady. The double dip Recession that many people, including myself, feared will not happen. However, the story is still that the U.S. recovery will continue to be very slow. We must now realize that the United States is no longer the center of the economic universe. Since World War II the U.S. has steadily become smaller and smaller in relation to world economic output. After World War II the U.S. generated over 50% of world economic output. Now the U.S. generates approximately 25% of the whole. I agree that is still huge amount, but that portion declines each year. China will eventually take over as the dominant economic superpower in the world with India rising quickly to the top, too. Show, or at Least Lend Me the Money The citizens of America are very upset that Obama only focused on big banks that assisted the large Wall Street banking firms. Many smaller and medium sized banks that funded small homeowners are now out of business and received no bailout monies. Meantime the larger banks have been recovering by raising credit card interest rates and squeezing consumers, but for the most part, are still not lending money. Instead, they use their profits to offset future loses on bad mortgages. In other words, tax payers bailed them out, but these banks don’t look like they will lend money any time in the future. And what’s worse, they will continue to squeeze the very taxpayers who bailed them out, in order to garner every cent of profit they can. grow. protect. invest. Base Your Decisions on Complete Information “In the U.S. we are seeing a few key economic indicators that are positive. Manufacturing numbers have improved and retail sales have remained steady. The double dip Recession that many people, including myself, feared will not happen. However, the story is still that the U.S. recovery will continue to be very slow.”
  8. 8. Protecting Jobs: In Canada the big economic story is that the BHP Billiton proposed takeover of Potash Corporation of Saskatchewan will not be allowed by the Province of Saskatchewan and the Canadian Federal government. The two governments felt that over time the jobs would be shipped outside of Canada and erode that country’s tax base. This is a focus of my discussion on Canada this month as this company is one of Canada’s largest. As a capitalist I am saddened by this news, but as a Canadian I am happy, because Canada over time would simply become a shell for its commodities and it would have no major companies impacting the economy left. This decision clearly sent a message to foreign buyers that other companies such as AGRIUM and Research In Motion are also off limits to foreign buyers. The message is: Canada is not for sale. Commodities: We also see that the Canadian economy is polarized at this time. The commodity sector is exploding with activity and the manufacturing and export sector is being hurt. The low U.S. dollar is making commodities less expensive, due to the fact that commodities are priced in U.S. dollars and it takes fewer U.S. dollars to buy the same amount of commodities. This has caused a boom in demand with Canada being a beneficiary. However, the problem is that the Canadian dollar is now at par with the U.S. dollar and that is destroying the manufacturing and export market in Central Canada, particularly Quebec and Ontario. At the same time the housing market remains flat in the major cities like Vancouver, Toronto and Calgary. Interest Rates: Last month it looked like the Bank of Canada was on track to raise interest rates, but interest rates in Canada will continue to stay at 1% due to slowness in Real Estate and the downgraded expectations of the global economy. The economy in Canada is running at a slower pace than it had expected. The Bank of Canada will only look at raising interest rates when both the Canadian and U.S. economies are on a sustained and stronger recovery path. The reason Canada bases its economic policy on what is happening in the United States is because Canada, which is a major export nation, still exports 80% of its goods and services to the United States. Therefore, recovery in Canada is directly related to recovery in the United States until such time as Canada exports much more of its goods and services to other countries such as China. On the Asian Front China continues its double digit growth and the Chinese Government is slowly raising interest rates in an effort to curb inflation. The Chinese economy has completely extricated itself from the downturn risk that emerged after the outbreak of the global financial crisis in 2008. The economy is growing by 10.6 percent in the first three quarters of the year, which overshadows all other Western countries and even some emerging nations. The one major problem that China is having is due to the fact that the banks have been unrestrained in their lending. Despite the government’s vigilance over credit over-expansion and the series of measures it has taken to rein in fluidity, the credit distribution is still on a large scale this year, fueling excessive fluidity. Under these circumstances, property prices have kept skyrocketing, costs which will inevitably be passed along through the price of consumer goods. The Chinese will have to take steps to reel in this predicted inflation, make efforts to contain the Real Estate bubbles occurring in many cities, and rein in excess liquidity. In America we have seen the dire consequences when credit is too easy to obtain and this is the potential situation that might blind side China. What should investors do? Any information here should be discussed with your licensed financial advisor. In broad terms if the Feds in the US continue with their stimulus programs to weaken the US dollar then stay the course. Agriculture and oil both make sense due to the upward pressure of extra dollars being created causing inflation. Gold and silver will also continue to move up as long as the Feds don’t stop their Quantitative Easing Programs. I actually prefer silver over gold as silver tends to move up as a percentage more than gold when commodities in general are moving higher. The emerging markets continue to look strong and discussion with your financial advisor about Emerging Market Funds that have a currency hedge is a prudent strategy at this time. If you are already heavily invested in the market begin to look at taking profits and if you are not yet in the market we are in a period of elevated risk due to the run up of stocks almost 15% in the last 8 weeks. grow. protect. invest. On the Canadian Front “China continues its double digit growth and the Chinese Government is slowly raising interest rates in an effort to curb inflation. The Chinese economy has completely extricated itself from the downturn risk that emerged after the outbreak of the global financial crisis in 2008.”
  9. 9. LVRealEstateClub.com In Summary The economic outlook continues to become more complex as global players seek advantages to strengthen their own nations. We will see many changes in the coming days, which make it imperative that you stay informed. For those who wish to learn more about the mortgage crisis in America and the overall economy I just made a video and posted it on YOUTUBE called “Las Vegas Real Estate: Profit from the Crisis”. This will give you a more comprehensive overview of what is happening in the US Real Estate Market. Please, use the comments I’ve made here as starting points and do your own research and speak with your licensed financial advisor. No one, not even me, can tell you what to do because there is no one- size-fits-all solution to our financial challenges. Only you know what is in your best interest. Until next time, stay alert, trust your own judgment and remain flexible. Mike Lathigee President Las Vegas Real Estate Club

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