Debt Ceiling Shouldn’t Cause Market Failure

If congress does not raise the debt ceiling there will be winners and losers in the stock market, but since low interest rates can be helpful to a short sited consumer spending driven economy there will be more losers than winners. While interest may raise, the United States may not pay off its debt obligations so it would not really be prudent to sell shares of profitable companies with low debt in exchange for notes that may or may not be paid off. The value of the dollar is bound to drop if the debt ceiling is not raised, however it is uncertain whether or not there will be deflation if the ceiling is not raised. There may be inflation either way. The only certain thing that has been happening throughout the debate is that people have been buying up gold and silver in mass quantity. The price of gold has risen to over $1,600 per ounce while silver has risen to over $40 per ounce. Oil is also on the rise, after Europe bailed out Greece and demand in the U.S. remains high. If the raise in debt ceiling results in a plan to raise taxes, the market will most likely react negatively. Regardless, in the age of reckless spending and lack of thought on the debt issue, I’m sure a plan will be devised in the last minute which will make sacrifices on both ends – an increase in taxes plus a reduction in spending. However, if the reduction in spending does not exceed the amount of ceiling increase the debt problem will only get worse. Raising the imaginary “ceiling” is an imaginary move that will have a placebo like effect. Long terms changes must be enacted before default is necessary or inflation skyrockets through the roof (which if you use the price of gold to gauge inflation it already has). Pay close attention to what comprises consumer price index, as the basket used to determine this has been changing over the years to help make it look like inflation is lower than it actually is.

Gold Price Rises with Vigor

The price of gold as of right now up $11 to $1007, thanks to not only a weaker dollar but stronger demand especially from China who is trying to slowing lessen its addiction to the US dollar. Silver is up $0.17 to $16.83, as another store of value besides gold. Platinum has seen the largest gain of almost $35 today per ounce to $1321. The weakening dollar comes with a five day streak in the stock market, as the Dow Jones Industrial Average reached its highest point in 2009 yesterday. Below is a Kitco chart of historical prices of gold:

1975 To Present

1975 To Present

On the street, however, poverty is at its eleven year high and unemployment is the highest in over 27 years [1]. It is certainly bad news for those without investments, as their earning power has decreased. The USD was worth 107 Japanese Yen just a year ago, it is now just worth 90. Today’s drop in value of the USD versus the Yen was over 1.5%! For currency traders, some interesting currencies to look into include the Singapore Dollar (SGD) which has gained 20% on the dollar in just five years, or the Japanese Yen or Euro which has gained the same percentage in the same time period. One must also consider which government programs have been enacted in recent months or years that will effect the value of these currencies, such as the the US, Chinese, and EU stimulus packages which have drastic differences in allocation.

For example, so far the US stimulus package spending breakdown and status can be found here, and details on the China’s 586 billion dollar (USD)  stimulus package are still fuzzy but presented to some degree below:

Chinese Stimulus Breakdown

Chinese Stimulus Breakdown

[1] Civilian Unemployment Rate, Federal Reserve Website

In the Long Term, Many Stocks are an Obviously Sweet Buy

Background
Looking at long term charts of virtually any mentionable stock on the market will most likely yield the same result, a glaringly obvious BUY. There are other reasons to get your money out of hard currency, such as the impending unprecedented inflation that will follow the Bush and Obama administration reckless handling of our economy and outsourcing to the Federal Reserve. The Federal Reserve, shrouded in secrecy, is a private organization which needn’t reveal its inner workings or meetings to the public, yet is in charge of the creation of currency and the interest rates.

Watch Out for These
Some stocks need to be watched, however, that they correspond to corporations that are safe from new legislation. Some of these may include arms manufacturers, as the future of the right to bear arms is possibly under threat under Obama’s administration and new Justice. Another potential victim is the health care industry, which include pharmaceutical companies. Add on to this military contractors, as so far the track record in the administration is we are already paying too much for heavy machinery (take for example the reduction of F-22 orders from Lockheed Martin).

Look Into These
Some strong stocks to look into for real returns over the long run are stable bank stocks, or banks that cannot go under without cataclysmic consequences to the economy (we know the US Gov’t wont let another Lehman Brothers fail). Among these are Citigroup (NYSE:C) and Bank of America (NYSE:BAC). A good example of an already partially recovered bank stock is Wells Fargo (NYSE:WFC). As you can see Wells Fargo underwent a reclaimation of value much earlier than C and BAC. My personal opinion of the two is that Citigroup will undergo the largest percent increase of the three. 10 year charts of these banks are shown below:

c

bac

wfc

Don’t Like Bank Stocks?

If you’re looking for a safer investment than bank stocks, then you might try chemical companies such as Dow Chemical (NYSE:DOW) or Huntsman (NYSE:HUN). In the last six months Dow has risen from less than $7 to today’s price of $21.10.  Huntsman has risen in the same period from the low 2 dollar range to $7. This is a 200% increase for Dow and 250% increase for Huntsman. They still have potential, though, as Dow was trading in the 40’s in 2007 and Huntsman in the mid 20’s in the same period. Both pay dividends and are profitable with a small P/E ratio.

If you hate stocks in general then I suggest putting money into cheapened real estate, precious metals, or even oil futures. Keep in mind all contents in this entry are speculative and no responsibility of loss is mine.

Where to Keep Your Assets

As we have seen in the past few months we know that the dollar is currently at an artificially high value, and meanwhile company stock values have plummeted to record lows. As the saying goes, buy low sell high. Now is obviously the time to buy.

If you are still too wary to put your money into stocks, may I suggest buying gold or silver as they are to me only waiting to spring back up in price once the bailouts take full affect on the credibility of the US treasury and dollar.

Most importantly, you want to be debt free of course. After that, you may consider investing in some promising stocks (I definitely would not suggest short selling at this point).

So in short:

  1. No Debt
  2. No US Dollars
  3. Invest in precious metals, emerging markets, or good stocks

If you decide to buy precious metals, be careful who you buy from. Stay clear of goldline.com because they will charge you if you’re not careful 30 to 40 percent above spot price for a coin they call “collectable”. In all reality, these coins that they tout can be easily bought at price that holds a trivial spread.

Precious Metal Option

It’s better to buy at kitco or perhaps at your local coin dealer/ pawn shop for gold coins.

If you are going for silver, better buy in bulk as it is heavy and costly to ship. Again, your best choice would be to buy at a local dealer.

Emerging Market Option

Although I only have a rudimentary grasp emerging markets in general, I have done some research and experienced real growth in China. I still believe it is a good route to invest in the Chinese economy or currency. Others may suggest India or Easter Europe, but I have not looked into it at present. There are a few mutual funds out there that tap into emerging markets.

A few I can name of the top of my head are:

  • Matthews China Fund (Symbol MCHFX)
  • Matthews Asia Pacific (MPACX)
  • Matthews India (MINDX)

Good Stocks Option

I’m not going to list any stocks here, because these days you won’t find a very stable one and I don’t want to be held liable (legally or emotionally) for any losses. Do your homework and find your own.

Good luck securing your assets for the future.

Are Gold and Silver Money?

The question is age old. For thousands of years people around the world have valued these two precious metals to be valuable and tradable. Gold, because of it’s malleability, divisibility, and scarcity. Silver because of it’s radiance and pureness. As of late the price of these two elements has plummeted in response to an apparently stronger dollar. But how long will it last?

The US dollar is really quite unstable, that is, it has no backing of any kind and can be printed at the whim of the Federal Reserve. This, in essence, is what creates inflation. When more money is printed than goods produced, inflation occurs. Now if the opposite is true, that is to say if no money at all is created but the amount of production in the system increases, then deflation would occur. The result of deflation would be an increase in the purchasing power of a dollar. The thing is deflation will hardly ever occur, because it would not be in the interest of the Federal Government. Think of this, the US debt is around $9,687,000,000 and increasing every day at an average rate of $1,900,000,000 since Fall 2007. Do you think it would be in their best interest for the value of the dollar to increase?

The answer is no, and the only reason why the value of the dollar has been forced to increase over the past few days is because investors are pulling out of stock on fears of a slowing economy. Where they put there money was the dollar, and that in itself caused the increase in value. It is my personal opinion that today, September 11, 2008, is a great day to invest in gold or silver securities. Even better is to buy the real stuff. [Today the price of silver is ~10.65 and gold is ~748.70]