‘Lazy Money’ – The Biggest Bear Market You’re Not Hearing About

Money isn’t created equal, just as economic growth isn’t created equal. There’s real organic growth and there’s artificial growth. The same is true for money. Although the system is flush with money, it’s lazy money.

What is ‘lazy money?’

Lazy money doesn’t move. It keeps to itself and doesn’t spread the love. Lazy money is like a couch potato, it plops itself down and stays down.

Today’s U.S. money supply is lazy, it has no motility or (to use Wall Street jargon) velocity.

What is money velocity?

The velocity of money is the frequency at which one unit of currency is used to purchase domestically produced goods and services within a given time period.

In simple terms, money velocity measures how often one dollar is used to buy goods and services. Decreasing money velocity means that there are fewer transactions between individuals in an economy.

Lower money velocity means that each dollar is touching fewer lives. To illustrate:

A dollar earned by an employee, spent in a restaurant, paid in wages to a waiter, who uses it to buy an iPod does more for the economy than a bailout dollar given to banks (NYSEArca: KBE), where it’s kept as a stagnant number on the balance sheet or dumped into stocks (NYSEArca: VTI).

What’s the velocity of money right now or how lazy is the dollar?

The chart below plots the S&P 500 against velocity of M2 money stock. M2 velocity data goes back to 1959, so does the chart.

The S&P 500 ETF (NYSEArca: SPY) is obviously at an all-time high, but M2 Money velocity has been in a bear market since 1998 and has never been lower.

Here’s my theory. The Federal Reserve prints money and gives it to select financial institutions (NYSEArca: XLF), which park it in stocks and reap fat returns. Banks no longer need to lend. The stock market is where money goes to grow and velocity goes to die.

The conclusion is one you’ve heard before: QE benefits stocks more than the real economy and Fed-printed money isn’t benefiting the economy as much as ‘organic’ money.

If you were to liken the different ‘types of money’ to food; QE money would be considered junk food. Wasn’t there a documentary (Super Size Me) that showed what a diet of junk food does to a human body?

Bernanke likes Wall Street Fat Cats and we won’t have to deal with artery-clogging side effects of the QE junk diet. This will be up to Janet Yellen, Bernanke’s successor to be.

Based on the market’s reaction, investors believe that Janet Yellen will continue Bernanke’s legacy of QE junk food (there are even rumors she’ll super size the banks’ portion).

President Obama went out of his way to praise his nominee’s financial acumen.

In fact, best case scenario the President spread his praise on too thick, worst case scenario he flat out lied about Yellen’s ability.

You can read the glaring conflict between fact and the President’s misleading praise right here: Did Obama Lie About Yellen?

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE Newsletter.

 

Could a Strengthening Dollar Sink Stocks?

On a walk down memory lane, we discover bold statements like this one – “Nobody wants toxic US dollar” – made in April 2011. Today the dollar trades 8% higher. In fact, the dollar is right above key support. Will it hold and potentially sink stocks?

According to analysts, the US dollar has been doomed ever since the Federal Reserve started QE back in 2008. Every new round of QE draws the dollar doomsday crowd out of their den. To wit, I’ve included a few headlines below:

April 8, 2011: Toxic Dollar: Why Nobody Wants US Currency – CNBC
June 15, 2011: Dollar Doomed to Drop – UBS Technical Analyst
July 28, 2011: U.S. Dollar Poised for a Plunge – Peter Schiff

But nearly five years later, the greenback is holding its ground.

It may not be the strongest currency of the global currency basket, but the US dollar today – and that may be hard to believe – is trading exactly where it was back in 2004 (dashed purple line).

Albeit choppy, since August 2011 the dollar has consistently climbed from higher lows to higher highs.

Connecting the recent lows creates obvious support (green trend line).

The US Dollar Index came within striking distance of this trend line last week.

Will Support Hold?

A trend line is called a trend line because it delineates a trend. In this case an up trend. The trend remains up as long as price stays above the trend line.

Being aware of such trend line support is important for at least two reasons:

1) The trend line makes it clear that the dollar is at a key inflection point. Key support is like a rung on a ladder. If the rung breaks, you fall. If support fails, the dollar falls. If support holds, the dollar should ‘climb up.’

2) Dollar strength or weakness is not just a currency story; it’s also an equity event. There is a correlation (see below) between movements of the US dollar and stocks. A US dollar rally may lead to falling stocks. Why?

A falling dollar is good for exports and corporate profits and therefore good for broad US indexes like the S&P 500 (SNP: ^GSPC). A rising dollar is generally bad for corporate US profits.

Based on my assessment, the odds of a sustained dollar rally are currently greater than the odds for a decline.

The PowerShares DB US Dollar ETF (NYSEArca: UUP) provides long US dollar exposure. If support fails, it may be time to look at the PowerShares DB US Dollar Bearish ETF (NYSEArca: UDN) or CurrencyShares Euro Trust (NYSEArca: FXE).

Exactly how strong is the correlation between stocks and the S&P 500 (NYSEArca: SPY)? Could a US dollar rally sink stocks?

This article about the US Dollar/Stock Correlation shows exactly what a strengthening dollar would mean for US stocks.

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF

 

U. S. Government Confiscated Gold and Other Gold Facts You Should Know

Did you know that Isaac Newton was the London gold mint master and set the price of gold? Did you know that the U.S. government can and has confiscated physical gold? Is now the time to buy? Here’s what you should know if you’re thinking about buying or selling gold?

If you are reading this article there’s a good chance you’re thinking about buying or selling gold.

Before you trigger the trade, take a moment to learn about the ‘stuff’ you’re about to buy/sell. There are a lot of interesting little-known facts that may influence your decision.

History of Gold

The earliest recorded usage of gold dates back as far as 3000 BC, when Egyptian civilizations used gold for jewelry and decorative objects. Around 1500 BC, gold became a currency for international trade.

The first minted gold coin on record was produced in Asia Minor about 560 BC. In 1284 AD, the Republic of Venice introduced the gold ducat (called Zecchino), which soon became the most popular coin in the world.

Isaac Newton and the Gold Standard

In 1717, Isaac Newton (master of the London gold mint dating back to 1699) set the price of gold, which lasted for the next 200 years. The Coinage Act of 1792 placed the United States on a silver/gold standard.

In 1900, congress enacted the Gold Standard Act, which required the U.S. Treasury to maintain a minimum gold reserve of $150 million. This meant that dollars could be converted into gold at any time.

Currency based on the gold standard represented real value since, unlike paper currency, gold is not someone else’s liability. Gold’s value is established by the willingness of people to pay a specific price.

The Gold Standard Crumbles

In 1933, President Roosevelt took the country off the gold standard, which allowed the government to print the money needed to deal with the aftermath of the 1929 – 1932 decline. Two years later, FDR fixed the price of gold at $35/oz.

The gold standard was restored to some degree via the Bretton Woods Agreement (BWA) made in 1944. The prominent features of the BWA were an obligation for each member country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value in terms of gold.

The International Monetary Fund (IMF) was established to bridge temporary imbalance of payments.

The United States rejected the idea of a supranational currency (called bancor) and requested to make the U.S. dollar the default reserve currency. The request was granted and the greenback overtook the role gold should have played.

To bolster faith in the dollar, the U.S. agreed to link the dollar to gold at the rate of $35/oz. At this rate, foreign governments and central banks (not U.S. citizens) were able to exchange dollars for gold.

A two-tiered price system for gold was established in 1968. The first tier was for transactions between governments, pegged at $35/oz, while other transactions (the second tier) would be supply/demand driven. The expected price range for second tier transactions was between $35 and $50/oz.

The Death of the Gold Standard

BWA remained in force until 1971. After a big drop in U.S. gold reserves and a large increase in foreigners’ claims on U.S. dollars, President Nixon suspended the convertibility of the dollar to gold (known as Nixon Shock).

Since then, the U.S. dollar (and other currencies) has been “floating” without gold backing. 1971 was the beginning of a wild expansion of fiat currency and not to forget, fiat credit.

Gold Can be and Has Been Confiscated in the U. S.

Unknown to many Americans, the U.S. government has the right to confiscate precious metals held in a safety deposit box. In fact, President Roosevelt exercised this right in April 1933.

After declaring a banking holiday, FDR announced the following, as per the authority given to him by Section 5(B) of The Act of Oct. 6th, 1917:

“Pursuant to the above authority, I hereby proclaim that such gold and silver holdings are prohibited, and that all such coin, bullion or other possessions of gold and silver be tendered within fourteen days to agents of the Government of the United States for compensation at the official price, in the legal tender of the Government. All safe deposit boxes in banks or financial institutions have been sealed, pending action in the due course of the law. All sales or purchases or movements of such gold and silver within the borders of the United States and its territories, and all foreign exchange transactions or movements of such metals across the border are hereby prohibited.”

Compensation in the legal tender of the government meant that citizens were paid the official price of $20.67/oz. Following the confiscation, the dollar was devalued by 40% and the price of gold was readjusted and fixed to $35/oz.

How Much Gold is There?

According to the World Gold Council, there are only 163,000 metric tons (one metric ton equals 1,000 kilograms and is 10% heavier than the standard U. S. ton) of gold in circulation. This is just about enough to fill two Olympic-size swimming pools.

At $1,400/oz, all the gold ever mined would amount to roughly $7.4 trillion, or less than one ounce of gold for every person in the world. Gold is measured in troy ounces. One troy ounce equals 31.10 grams, while a regular ounce equals 28.35 grams.

Is Now the Time to Buy Gold?

The Profit Radar Report has been expecting to see a double bottom in gold around $1,250 – 1,300/oz. Click here for the most recently published free gold analysis on iSPYETF.com.

Premium analysis of gold and the SPDR Gold Shares (GLD)is provided via the Profit Radar Report.

VIDEO: How Much Lower Can the Yen Fall?

The Japanese government is planning to unleash another fiscal stimulus to boost the nations shrinking economy. I’ve lost track of the number of financial stimuli, but they are no doubt in the double digits. The next one is expected to be $136 billion.

No wonder investor confidence in the Yen is at an all time low. Small speculators are now holding a record amount of short positions. Thus far this hasn’t prevented Japan’s currency from a continuous slide lower.

Catching a Yen bottom now is like catching the proverbial falling knife and waiting for the first failed bearish low-risk entry before going long is prudent. This video highlights the first bullish signs of life that often provide fertile soil for extended rallies. Investors can get exposure to the Yen via the CurrencyShares Japanese Yen Trust (FXY) currency ETF.

>> Click here to watch video

How Much is the Dow Worth in Real Currency

The Federal Reserve is devaluing the U.S. dollar. Contrary to popular belief that hasn’t resulted in outright or obvious inflation, but as the Gold Dow shows, it is eating away at the Dow’s value.

How do you define value and is value important today or is value just relative?

After all, as long as you buy low and sell high, the value of the underlying stock, index or ETF doesn’t matter, or does it?

If you buy the Dow (or Dow Diamonds – DIA) at 13,000 and sell at 14,000 you pocket a nice profit, but was it a good value buy?

Obviously profits are always right, but value often determines profits. At least that used to be the case before the Fed’s flooded the market with liquidity.

Old souls that remember the name Charles Dow and his saying “to know values is to know the market” may find the chart below of interest.

It measures the Dow in the only real currency – gold – that’s why I call it the Gold Dow.

The Dow in U.S. dollars is shown in black, the Gold Dow is shown in gold. At the 1999 Gold Dow peak, the Dow Jones was worth 42 ounces of gold. Today it’s barely worth 8 ounces.

The 81% drop in the Gold Dow is largely due to gold prices, which soared from 260 in 1999 to 1,600 and above.

Thus far the Dollar Dow has been able to resist the path of the Gold Dow. In fact, there’s been a divergence for most of the past decade, so this is not a short-term timing tool. Nevertheless, other valuation indicators suggest that the Dollar Dow will eventually follow the footsteps of its golden cousin.