Friday, December 16, 2011

Ron Paul for President 2012

Typically I don't make public political endorsements, but this time around making the right choice for president has never been more important. I encourage you to review Ron Paul's campaign website, watch the videos below, and if you're up to it crack open a few of his books, particularly: Liberty Defined: 50 Essential Issues That Affect Our Freedom. For those of you who think Dr. Paul can't win, wrong, he's in a statistical tie for the top spot in Iowa: http://bit.ly/siysKphttp://bit.ly/uego8V

Finally, today (December 16th 2011) is Ron Paul's Money Bomb and I encourage you to contribute to his campaign and send a message of support on the anniversary of the 1773 Boston Tea Party.

Ron Paul Endorsement Videos
Ron Paul is an honest, principled candidate, with a consistent track record:


Ron Paul's Books
Ron Paul has a sound understanding of core issues as outline in many of his books:

Tuesday, December 6, 2011

Iranian Confrontation: Commentary

In the past few weeks there has been a steady escalation in tensions between Iran and the West. The latest including Iran's Revolutionary Guard going on war alert in anticipation of an imminent strike. Whether a strike actually materializes is anyone's guess, but this is certainly something to be aware of, especially in the context of recent developments including mysterious explosions in Iran, downing of a US stealth UAV, and foreigners being recalled from the country. There is no doubt that the CIA is on the ground and that the recently downed UAV was intentionally operating in Iran. The US story about it straying into Iranian airspace is highly unlikely. Why? There is no need for a stealth aircraft in Afghanistan where the airspace has been secured by US forces for some time. Stealth aircraft are mean't to operate in "denied airspace" environments. The only place in the region that such airspace exists is in Iran. Overall, it is likely that covert operations including sabotage are taking place in Iran as well as enhanced UAV surveillance using stealth aircraft. This may or may not be the beginnings of more serious confrontation, but at the very least it represents ongoing covert warfare. In essence, the US is at war with Iran.

If the said war becomes overt it has the potential to become very dangerous by destabilizing the Middle East, disrupting oil supplies, and choking off any hopes of economic growth. The combination of war, high oil prices, and an increasingly hostile sentiment at home would quickly become a volatile cocktail. War with Iran shouldn't to be taken lightly as it would surely go down in history as a pivotal turning point with unpleasant repercussions for the entire world.

Sunday, December 4, 2011

Propaganda, Deception, & Mental Conditioning

This post is a continuation of: "War is Constant, Inevitable, & Predictable." In this article I'll begin to address human behavior, methods of gauging sentiment, and stimuli that can be implemented to elicit relatively well-defined responses. This is mean't to be an exercise in developing awareness associated with deception and give clues as to how it's implemented.

Let's start with a simple truth: people have internally defined value systems. This implies that there is some sort of regular structure that obeys certain rules. Immediately one may argue that people often succumb to outside forces and abandon their values. This isn't really the case. What this actually implies is that outside forces go through a filter that can overwhelm or compliment their own internal constructs. Meaning, what a person says their values are and what they actually are may not be the same, or may have complex interactions with other values. In this light, how someone acts is far more important than what they say.

A 'good soldier' follows orders in a predictable fashion. There is minimal thinking and the internal value structure is designed into the soldier and defined during training. However, when the individual begins to think, it creates complex internal structures that aren't easily stimulated or controlled. In fact, someone who thinks becomes aware of manipulative gestures and begins to maneuver several levels deep. At this point, it becomes a game construct. A great example of this is in poker, say, Texas Hold'em. This is a game of incomplete information that utilizes deception. If an individual is unaware of deception involved in the game they will play in a very different manner than someone who understands that deception exists. Of course, the person who acknowledges that deception exists will regularly out-play the person who thinks that everyone is playing 'above-board.' This is the difference between winning and losing--being informed or misinformed. In this entire paragraph I'm trying to convey two simple ideas: 1) critical thinking is your best offense and defense against deception and 2) the presence of deception is an absolutely critical thing to be aware of. Without understanding these two concepts you will forever be subject to other peoples' ideas and conceptions. In a perfect world this might not be a problem, but in the real world, this is extremely dangerous.

So where's the danger? As described above, people have internal value systems that can be externally stimulated. This isn't necessarily a bad thing, but the source of stimulation is critical. At some level we all have to get our information from outside sources, we simply can't know everything as it happens, or even be experts in every field. If you get all of your information from a particular source you are going to receive a certain bias and your information will be incomplete or tainted. Of course, many people are aware of this simple fact and try to hedge against misinformation by varying their sources. This is a better approach, but still incomplete. The next step is to climb the information ladder and determine the objectives of each source on the way up. Each entity or person that you encounter on your ascent has a particular agenda, some noble, some vile, and everything in between. The capacity to 'read' each of these sources and think critically about the presented content is an invaluable skill. All the while one must constantly be increasing their own critical thinking capacity and knowledge base, and in doing so, blunt the effects of propaganda. A truly free society demands this accountability.

Now on to some current examples... Often people claim that all they want is happiness and security for themselves and the ones they love. Other times people are unable to define exactly what they want, and much less how they obtain said things. So without knowing, people are open to suggestions, and this is where it gets interesting. They take cues from friends, family, media sources, celebrities, etc. When it boils down to it, they take advice from other people, whether it's written, televised, taught or tweeted. If the CIA says there are WMDs in Iraq, then surely there must be. If the Federal Reserve says there is no bubble in housing, then all is well. If Fukushima wasn't melting down then why were radioactive isotopes detected outside the plant? There was no other plausible explanation. Anyone with any critical thinking capacity knows that lies are rampant, experts are often wrong, and things aren't always as they appear. Fair enough. The trick is to utilize individual and collective motive as an additional tool in determining truth. In doing so, deception must be acknowledge to make any meaningful headway.

That's all for now...

Saturday, November 19, 2011

War is Constant, Predictable, & Inevitable

When the topic of war comes up most people immediately envision bombs, bullets, troops and the like. A traditional military campaign. This is only one form of war, often the least desirable, but a valid form nonetheless. It is widely accepted as the least desirable because it threatens a common value: life. It is an uncomfortable and undesirable thing, which galvanizes everyone no matter what their opinion on the topic. Because it is so undesirable it is often the last type of war to be fought, with other forms leading up to it. This is an absolutely pivotal concept to grasp, because it implies that all-out war can be predicted based on prior events. If this is true, the trajectory can be manipulated to prevent it, cause it, or at the very least, prepare for it. So what causes all-out war to occur? In essence, what motivates people to accept death as a viable outcome? In this analysis I am not referring to small skirmishes such as Iraq, Afghanistan, or similar campaigns. These were initiated by decree and issued more as a 'job.' What I am referring to is something where common, non-soldiers are galvanized to the point of large-scale common resistance in either a civil or world war format. Determining this will provide the first clues as to the conditions just prior to traditional warfare, call it DEFCON 2, whereas DEFCON 1 is full-scale war.

As alluded to, people value life first. Second to life is liberty, or freedom. Third may be a sense of possession or ownership. To summarize, life, liberty, and property rights are universally valued, and often the source of war. As examples, if one feels threatened by another this is grounds for war to preserve their own life. If another power tries to enforce their will on a people, if pushed far enough, the people will initiate resistance on the grounds of liberty. Finally, if a land is conquered by a non-native force, the native people will be resentful, make claims to that land, and when possible, launch a military campaign to retake it. These are a small subset of examples, and one can think of many more, but the associated values are the source of the most fierce warfare in history including civil, revolutionary, and world wars.

As an aside, when someone commits a crime they are stripped of possessions (i.e. fine, confiscation), freedom (i.e. imprisonment), or life (i.e. capital punishment). This is how the justice system is constructed, and for obvious reasons. Punishment is designed to significantly alter the risk/reward structure, creating a net disincentive.

Now that we have established the three most valued traits the task of gauging becomes necessary. As a whole, the value associated with each of the traits is rather constant among people. Of course there will always be extremes where people are willing to sacrifice freedom to secure life, forego life for possession, or even sacrifice property for life. All-out war requires one to sacrifice life above all else, therefore it is dependent on the other two properties unless a direct threat on life is detected. In the absence of a direct threat the other two properties must be sufficiently strained, such that death appears to be less of a burden. This can be summed up in a simple quote: "I'd rather die than tolerate this." Of course, it is not that simple, because a fight precedes death and a fight has a probability of death associated with it. If that probability is sufficiently low, then the barrier to accept death as a possibility is much easier to overcome. For example, people get into their cars and drive to work every day knowing that there is a chance that they will be killed in the process; however, the perceived risk is sufficiently small compared to the reward, such as a paycheck and food on the table. People know that if they don't go to work, they may have no shelter, food, or other necessities. This forces them to take risks because the alternative is less desirable. Whether people know it or not, they are constantly evaluating risk/reward structures. Again, this is a pivotal concept to grasp because there is a commonality to this among humans. This common thread serves to fix certain parameters, which makes mass behavioral prediction much easier. This becomes more difficult on an individual basis because people have unique traits and value systems, but it is still possible. Further difficulty arises when the opposing individual is aware of your intentions. However, when dealing with people as a whole the conditions are rather constant. With the value system established, identifying human behavior and gauging sentiment is the next step toward predicting future behavior.

I'll stop here, but there are several more concepts to consider. This is because others also possess this knowledge and have an interest in influencing people around them. This adds stimulus to the system and competing agendas. You can think of the general population as pawns who are stimulated by outside forces (i.e. media, politics etc.) and those feeding the stimuli are on a second level. Further, there are those who understand levels one & two, they are third level players. They possess an intricate knowledge of the system and can influence any of the levels below. When you begin to understand the multiple levels, how they operate, and their weaknesses you can begin to infiltrate them. With all of this said, people share the same exploitable weaknesses. The entire value system is constructed from two underlying principles: fear & love.

Wednesday, November 2, 2011

Information Overload: Part II

cybergeography_book5.jpg
Young Hyun, CAIDA

Due to popular demand, I have put together another helping of economic information to supplement what's already on the blog. With that said, feel free to browse older posts as most are still relevant. If you find any of the information useful, share it.

Previous Blog Posts

Mike Maloney's Full Presentations on Gold & Silver *make sure you read this post*

Information Overload: Part I 

Money: What is it?

Chris Martenson's Crash Course (Economic Basics)
Outlined below is a good introduction to current economics and money. It is a little slow to start, but I encourage you to watch all of the videos. Also, note that this video series was created in 2008.

1. Three Beliefs: A short introduction, http://youtu.be/XnXZzx9pAmQ
2. The Three E's: Economy, Energy, & Environment, http://youtu.be/JTEHUbfP7OA.
3 & 4. Exponential Growth & The Power of Compounding, http://youtu.be/W2rTQpdyCFQ
5. Growth vs. Prosperity, http://youtu.be/k1KsFDLZ3B4
6. What is Money? http://youtu.be/U8dq1bH1X6s
7. Money Creation, http://youtu.be/qIxhsF6JLEA
8. The Fed & Money Creation (be sure to watch this one), http://youtu.be/p3_Q1SiRN-A
9. A Brief History of US Money (more on the Federal Reserve), http://youtu.be/kM7rITeNW6U
10. Inflation (everyone should understand this), http://youtu.be/afWqKcqntfs
11. How Much is a Trillion? http://youtu.be/caMRBGmja3w
12. Debt (must understand), http://youtu.be/bcc-TqvCXqU
13. A National Failure to Save, http://youtu.be/Mrp1N1N2cWs
14. Assets & Demographics (interesting discussion about baby boomers), http://youtu.be/fUJU1aLEQQA
15. Bubbles (housing included, also see blog posts related to Real Estate), http://youtu.be/0F7SCbrU5sQ
16. Fuzzy Numbers (fyi: government numbers are a joke), http://youtu.be/zPkTItOXuN0
17a. Peak Oil, http://youtu.be/cwNgNyiXPLk
17b. Energy Economics, http://youtu.be/WeBtdwPpTQM
17c. Energy & The Economy, http://youtu.be/6w6gf3tSGTg
18. Environment, http://youtu.be/PfAQktktGgQ
19. Future Shock, http://youtu.be/YDNvr82gqd0

Relevant Interviews & Presentations

The mainstream media would have you believe that the economic collapse was unpredictable, however this couldn't be further from the truth. Thanks to YouTube and the internet, one can look at the track records of those who predicted the collapse and learn how they were able to do so. Reverse engineering if you will... There were a number of individuals who saw it coming, warned of it, and some even profited. Outlined below is an assortment of individuals who I'd say are in the know, be sure to check them out.

Peter Schiff: Without a doubt he has a sound understanding of how things work, especially in the economic realm. He gets it and has a track record to prove it. Period. http://youtu.be/6uDbrvir6Lo. Also see Peter Schiff's 2006 Mortgage Bankers Presentation where he predicts the housing collapse:  http://youtu.be/6G3Qefbt0n4.

Jim Rogers: He's a smart guy and a commodity pro. I have the utmost respect for Jim as he's a straight shooter and tells it how it is. Check out his YouTube channel: http://youtu.be/PnozPXgHYeM.

Gerald Celente: He's not an economic/finance guy per se, rather, he understands the full system and has an unparalleled grasp on history and the projection of human nature and events. He may seem a little off the wall at first, but he has a track record to back up his predictions. His trends journal can be found here: http://www.trendsresearch.com. Also be sure to check out the top 11 trend predictions of 2011 (released in January of 2011).

Other Informational Videos

Gold: Independent Money, http://youtu.be/RvL_Dm2d99A.

Money as Debt (slightly grainy, but includes a good history), http://youtu.be/Dc3sKwwAaCU.

Useful Blogs

Zerohedge.com, though the information is often deep and involved, it is one of the most valuable economic/financial resources out there. I check Zerohedge every day, no exceptions.
SHTFPlan.com, if you're the survivalist type, you'll have a fun time here...

Wednesday, October 19, 2011

Economic Basics: Gold as a Stabilizer

Over the years I've found that economists (typically those with a PhD) tend to complicate the basics of economy to the point of absurdity and incoherence. In this entry I'll touch on a simple idea: "How Gold Remedies Trade Imbalances."

The market is a complex system that functions based on simple underlying principles. With that said, a complex system can be built using simple concepts. In contrast, corruption of the underlying principles ultimately results in an unstable and imbalanced system. Though many would have you believe that economy is primarily about consumption, this is incorrect and does not lead to long-term prosperity. Consumption can only occur with sufficient production. When consumption overwhelms production, it inevitably leads to imbalances.

As an example, it is well known that the United States carries a large trade deficit with China, meaning, the US is a net consumer of Chinese goods. The US benefits by acquiring cheap products and China benefits by creating low-paying jobs at home. This has resulted in many manufacturing and production jobs being located overseas. Some will attribute this to a myriad of policies on both the Chinese and US side, but when it comes down to it, it's rooted in the monetary system. For example, if the US dollar was backed by gold the deficit would naturally arbitrage itself away. Instead of holding US dollars the Chinese would begin to redeem gold from the Federal Reserve. This would reduce the amount of gold backing the dollar, ultimately devaluing the currency. The devaluation would reduce the cost of US labor and goods, increasing the competitiveness of US exports. Of course, devaluation of the dollar is not a good thing, but it would force trade to balance before it got out of hand. 

This is a quick example of how sound money naturally stabilizes trade relations. Without sound money the deficits are allowed to grow without consequence until they reach disastrous proportions. Currency manipulation mounts, jobs transfer to the lowest bidder, and trade wars begin.

Monday, September 12, 2011

Obama's Jobs Act: It's Terrible, Here's Why

There have been many analyses provided on Obama's job speech, so I'll keep my commentary short and link you to a few good sources to compliment the analysis (scroll to bottom). 

The entire transcript for Obama's "Jobs Speech" can be found here, while the analysis is as follows. Quotes are italicization and indented. Keywords for analysis are underlined by the author. Let's begin...
These men and women grew up with faith in an America where hard work and responsibility paid off. They believed in a country where everyone gets a fair shake and does their fair share – where if you stepped up, did your job, and were loyal to your company, that loyalty would be rewarded with a decent salary and good benefits; maybe a raise once in awhile. If you did the right thing, you could make it in America.
In this paragraph Obama describes his interpretation of what American workers use to believe. His first sentence is correct where he indicates hard work and responsibility used to pay off. Today that has been destroyed by government, unions, and wall street to name a few. This is rooted in moral hazard, inefficiency, and criminal acts that occur by wall street firms that are essentially sanctioned by the government. In essence, the government has destroyed the rewards associated with hard work by tinkering with the economy and selective implementation and creation of law. He also says "...a country where everyone gets a fair shake and does their fair share..." This is an absolutely skewed interpretation, outright false, and plain un-American. I hope I've made my disdain for this clear. America was never about being fair (nor is life), it was about being just, where everyone was issued the same rules. This is the difference between communism/socialism and free market capitalism. The fact that the president actually said this in such a prominent speech should raise alarm for everyone as it is not what America was ever suppose to be about. Moving on...
...Building a world-class transportation system is part of what made us an economic superpower...
The American Jobs Act will repair and modernize at least 35,000 schools. It will put people to work right now fixing roofs and windows, installing science labs and high-speed Internet in classrooms all across this country. It will rehabilitate homes and businesses in communities hit hardest by foreclosures. It will jumpstart thousands of transportation projects all across the country.
An issue that I have with these "public works" job creation plans is they simply don't work, especially in modern day America where we're not trying to truck along dirt roads. There are two ways that you can look at this, short-term and long-term. In the short-term you can create busy work, but that doesn't necessarily result in long-term gain. The government doesn't have the ability to correctly dictate which projects are needed, which inevitably results in misallocation of capital, inefficiency, and waste. Instead the government should simply let the private sector keep their money and invest it efficiently as the markets determines where the best dividend producing projects are. To think that a government bureaucracy is efficient enough or intelligent enough to determine how capital should be allocated is naive at best. Would you let the government invest your personal funds? Of course not, but that's exactly what they are doing when they take and allocate capital as they see fit. There is absolutely no difference, and the outcome is always the same--disastrous.
It’s not just Democrats who have supported this kind of proposal. Fifty House Republicans have proposed the same payroll tax cut that’s in this plan. You should pass it right away.
In this short paragraph the president is trying to appeal for consensus. This should really indicate that the proposal is even more toxic as there is plenty of incompetence in Washington to go around.

With this short commentary, I'll turn you over to the videos below, which address the details more completely, and in the interest of efficiency, I won't repeat what's already been said, even if it is "shovel-ready."

Addressing some other points of Obama's speech

Peter Schiff (always a must watch)


VisionVictory Channel. He discusses the moral hazards associated with Obama's proposal and some other current events including the Swiss Franc flash crash, which can be found in a previous post here.

Friday, September 9, 2011

Flash Crashes: Silver, Swiss Franc, Gold

A montage of "efficient" markets...enjoy.

First off, silver. The key things to note here, 1) The complete lack of volume the hour prior to the take-down, 2) The volume during the take-down, which is orders of magnitude greater than the previous hour, 3) The fact that this took place Sunday night during very thinly traded hours, and 4) the similarity to the Swiss Franc candle below. Overall, this decline occurred under highly suspicious conditions. Unlike currencies which are overtly manipulated, precious metals take on a more clandestine form, but are blatantly obvious to anyone who follows these markets closely, heck even passively. To date central banks have been unwilling to admit their participation in full, but have indicated various degrees of shenanigans with little media attention. Take a look at GATA for more information on how this has been occurring for years.

(click for larger image)
The Swiss, typically a neutral country, has entered the currency war with guns ablazin'. This is how a national currency, and a national people, lose over 8% of their purchasing power overnight, thanks to central banking. 

(click for larger image)
A measley 8% you say, let's take a look at the bigger picture:

(click for larger image)
Scratch that. We have a decline on the order of 18%, but that took a little over a month. So what exactly are we looking at? Essentially how fast a currency can be devalued when a central bank deems it necessary. Down the road the Swiss will learn that this is a zero sum game and the markets will inevitably overwhelm their target. Defend as they might, they'll eventually be overrun and have wasted a lot of money in the process.

Finally, I'll leave you with gold which has increased from roughly $250/oz ten years ago to over $1900/oz more recently. In one of the more recent peaks it experienced a peculiar smack-down, which of course looks similar to any one of the currency intervention charts. In reality, gold is manipulated, currencies are manipulated, bonds are manipulated. The whole works, so when you think you are making a sound investment in paper assets traded on exchanges where derivatives and margin are commonplace, don't forget that margin can be changed, some central back can sell short with reckless abandon, and of course they rarely never play fair.

(click to enlarge image and uncover the mystery)



Sunday, September 4, 2011

The Economic Food Chain: A Snapshot

The basis of economy is rooted in peoples' need for essential items, and their wants for discretionary items. So let's begin with the basic human needs: energy, water, and to a certain degree, shelter. At first glance it may seem that food was left out, but this is actually a subcategory of energy. Shelter was added because it is often needed to increase your energy efficiency, as in, keep you from getting too warm or cold relative to the outside temperature. Finally, fresh water is the last essential element for obvious reasons, namely, you'll die without it and so will everything else. In summary, humans need energy, food, fresh water, and shelter. At the end of the day we are all working for these basic necessities. As an example, we buy food at the grocery store, fill up our gas tanks (energy), pay rent/mortgage (shelter) and utilities (water, sewer, electric). If we lack any of these essential elements we'll at the very least be uncomfortable, and at worst, be dead, so this is the basis of economy. Essentially, all of us are willing to work for these necessities

At the very core is energy because without it none of the other essentials can be obtained. In the modern world there are three basic forms of energy that are harnessed daily: electric, combustible (food, oil, gasoline, etc.), and photosynthetic (plants harnessing the sun's energy). Food and energy form a one-way "feedback loop", meaning, you can't get food without energy. 

To clarify this point, let's take a look at a simplified supply chain:
  1. At the farm level, land must be cultivated, this requires a refined or distilled oil product (typically diesel) to operate modern machinery.
  2. Fertilizer consisting of nitrogen, phosphorus, and potassium (N-P-K) are usually applied to the soil. Nitrogen is typically made through a steam reforming process involving natural gas. Phosphorus and potassium are mined from various locations around the world and then transported to the farm. Mining operations are heavily energy intensive requiring extraction and processing followed by multiple transportation legs. Again, oil is the primary energy source.
  3. The machinery used to plant and harvest was made somewhere and is predominantly steel. Steel is a product of iron ore, which is extracted from the earth through, you guessed it, a mining operation. Once extracted, the iron ore is processed into steel at a foundry, requiring an immense amount of heat. The heat may be generated by any available energy source granted it's economical for the foundry. The steel must be fabricated into various forms that would be required to build the farm machinery (tractors, combines, etc.). Finally, the assembled product is shipped to the farm by rail (diesel) and truck (diesel). Of course, I'm being concise in this description, but one can imagine the general flow.
  4. With the machinery in place and the soil fertilized, seed can be planted. As the crop grows it requires fresh water through irrigation. Irrigation is a pressure driven operation, requiring a pump, which draws electricity.
  5. At this point we have used a large amount of energy just to plant the crop and maintain it. Our payback comes from the crop harnessing solar energy through the process of photosynthesis.
  6. Once the crop has matured, additional energy is required to harvest, process, and distribute the crop to its various users (more oil).
Even in this simplified scenario, the process is quite elaborate. It should be evident that energy, typically in the form of oil, is the Achilles' heel of the entire operation. Should the price of oil increase, multiple points in the supply chain will experience an increase in cost. Once this occurs, food prices increase and begin to move more money from the "wants" category to the "needs" category. Meaning, that nice new iPad gives way to a loaf of bread or a gallon of gasoline. The increase in oil prices can be achieved in a number of ways, typically through increased global competition for the resource (increased demand), dwindling supply, or currency debasement, which increases the cost of imported oil as the currency's purchasing power is reduced. Today we have all three components in play, which will inevitably lead to a scramble to secure energy resources. The US infrastructure has become so accustomed to cheap oil that a sudden increase in oil prices would send shock waves throughout the economy, bolstering those in the energy and food production sectors.

In this discussion energy, food, mining, and water have been highlighted as the essential elements for not only economic growth, but fundamental survival as an economy's "needs" must always come before its "wants." This is due to the simple fact that energy and food are higher on the economic "food chain." Once they become scarce, they overwhelm elements that are lower on the chain. I believe we're in the process of shifting into a resource-limited paradigm, and if so, this is where you'll want to direct your efforts for long-term gain.

Monday, August 29, 2011

Gold/Platinum Spread: A Rare Event

Recently the price of gold surpassed that of platinum, which is a rare event. Once this occurred, it wasn't long before platinum overtook gold and began trading in lockstep as gold moved higher, consistently trading for a small premium. It seems that as gold approaches platinum, it begins to trade as a monetary metal. The spread between the two prices has converged before (the ratio approaching 1), and occurs on occasion. Inevitably, platinum trades at a premium. Even during the '70s gold boom, platinum demanded a premium. The most recent convergence occurred after the Lehman failure in '08 and within a month, platinum was trading at a $150 premium, before increasing to $400 in the Spring of 2008 during the stock market sell-off. Since then, platinum has held a premium averaging around $300, until now. If history is any guide, it should retake a premium on the order of $250, or more. This poses a potentially lucrative pair trade that is under appreciated, and seemingly unrecognized. In practice, your risk is managed by the natural convergence barrier, while there is plenty of room for divergence. Overall, an interesting trade that rarely presents itself with such favorable conditions.

Going forward what does this mean? It may mean that gold is overextended and will re-enter the prevailing channel as shown in the figure below. It seems that something has to give, either gold must retrace a little more, or platinum needs to appreciate.

(click chart for larger image)

Wednesday, August 24, 2011

Market Notes: Jackson Hole & Metals

Key dates for the remainder of this week
  • August 25th, 2001, is Gold & Silver options expiry: http://bit.ly/bBZmuf.
  • August 25th, 2011, the latest Gold margin hike takes effect: http://bit.ly/ocZClP.
  • August 26th, 2011, Fed conference at Jackson Hole where Fed Chairman Ben Bernanke is expected to give some direction on Fed policy.
General Notes
  • There is a lot of expectation for the Fed to do something to spur the economy. At the same time there is political pressure to cease stimulating. Either way, the market seems to have figured out that a policy of easing does not spur the economy. Expectations coupled with a general lack of confidence may result in disappointment no matter what the Fed says. They can get around this if they choose to change the method in which they stimulate and slap on a new label. However, this runs the risk of stoking inflation expectations.
  • The Fed could also stay on the sidelines and indicate that they will monitor the markets and look for further deterioration before stepping in. This route, as the policy suggests, would result in broad-based market weakness resulting in a flight from equities into bonds and potentially gold & silver, though primarily gold. Of course, the Fed would have to be careful as further weakness may topple the already weak financial sector, think Bank of America ($BAC). This play would neutralize the unpopular politics of easing, but is a serious gamble should the markets plummet. At which point, a shock & awe stimulus program would have to be implemented.
  • Of course the Fed would like to have its cake and eat it too. In this way the Fed would like to push bond buyers into stocks by pushing down the bond yield. This would push up equities and produce a negative return on fixed-income. Commodities would also be bid up, and this is where the Fed continues to run into issues with inflation and the consumer. Finally, if the Fed is successful in increasing the currency velocity we could very quickly become engulfed in an inflationary nightmare.
Overall, the Fed doesn't have a hand and can only buy time before gravity sets in. In poker terms, the Fed is drawing dead where the "turn" card will be revealed at Jackson Hole on Friday August 26th 2011. I expect the "river" to come down within 6-12 months...

Tuesday, August 16, 2011

Mike Maloney's Full Presentations: The Current Cycle

Please, do yourself a favor and watch these videos completely, understand the material, and do your own research. You'll be rewarded for your efforts.


Also, see his previous video further explaining the the current cycle:



Saturday, July 16, 2011

Evaluating a Home Purchase - Post Bubble

As I stated in my last post, I'm not in favor of buying a home given the current and medium-term economic projections. With that said, I'll outline a typical home buying scenario, how to evaluate costs, and provide some methods for managing your risk should you choose to buy (if you're ready to buy skip to Part IV). There are plenty of arguments both in favor and against home ownership, but here I'll boil it down to the hard numbers and hopefully provide some useful insight.

Typical Case: Part I
Figure 1: Input parameters for
Zillow mortgage calculator.

We'll start by defining a typical case, which is outlined below.
  1. Home Price: $175,000 (near the median U.S. home price as of 2011)
  2. Down Payment: $17,500 or 10% of the home value (chosen to be low for risk management purposes)
  3. Loan/Principal: $157,500 (home price minus down payment, $175,000-$17,500)
  4. Interest Rate: 4.4% (prevailing 30-year rate as of July 2011)
  5. Mortgage Type: Fixed 30-year (an adjustable rate is not advised)
  6. Property Taxes: 1.4% (varies considerably by state and locality)
  7. Home Insurance: $700/year (varies considerably by location, this is roughly the national average as of July 2011)
  8. Private Mortgage Insurance: $77/month (based on home value to loan ratio and mortgage details. A down payment of 20% or more does not require mortgage insurance)
Figure 1 provides a snapshot of the input parameters for a mortgage calculator that can be found at Zillow.com. If you use their calculator be sure to click the advanced arrow to include property taxes, homeowner's insurance, and private mortgage insurance. In addition, click on the "Advanced Report" to get the amortization schedule and a detailed cost output. It should be noted that several costs and credits are not included, namely, maintenance, Realtor fees, and loan initiation fees, to name a few. In addition,  tax benefits from interest payment deductions are not evaluated.
Cost Evaluation: Part II
Figure 2: Total monthly costs associated with the home purchase outlined in Figure 1. Maintenance costs can be added to the 'Homeowner's Association Dues'' if desired.
Running the calculator results in the output shown in Figure 2. The total monthly payment is $1,128 and does not include maintenance costs, which may average 5-15% of the monthly payment. The greatest cost is associated with the principal and interest payments (70%) followed by property taxes (18%), private mortgage insurance (7%), and homeowners insurance (5%). Over the course of the 30-year loan the total interest payment amounts to $126,231 (72% of the current home value) and other sunk costs (taxes, fees, & insurance) amount to $122,378 (70% of home value) as seen in Figure 3. Overall, the total cost for the home after 30 years amounts to $406,108, or 232% of the current home price.
Figure 3: Total cost breakdown for all parameters (top), and a visualization of the amortization schedule broken down into principal and interest (bottom).
Now for the detailed amortization schedule, which includes the portion of your payment that goes to paying off the principal and that which is lost to interest. In theory, the principal goes toward building home equity whereas the interest goes to the bank and becomes a sunk cost (i.e. it adds no value). It should be noted that the breakdown in Figures 3 & 4 are for the principal and interest components only and do not include taxes, fees, and insurance as outline in Figure 2.

At the end of the first year the total payments amount to $9,458 where $6,869 (73%) goes toward interest and $2,589 (27%) goes toward paying down the principal. If you include taxes, insurance, and fees the breakdown is less favorable where $13,536 is paid in total, $6,869 (51%) goes to interest, $4,078 (30%) goes to taxes, insurance, & fees, and $2,589 (19%) goes to paying down the loan. Put another way, 81% are sunk unrecoverable costs, and 19% goes toward paying down the mortgage. On a monthly basis, this means your monthly payment of $1,128 is divided into two categories: $914 of sunk costs and $214 toward paying down the loan (for the first year). Over time the percentage of your payment that goes toward the principal increases, as seen in Figure 3, thus the first year is the most unfavorable for building equity. It gets better over time, but the cross-over doesn't occur until more than 15 years later, and even longer if you include taxes, insurance, & fees.

I've been careful to distinguish between "paying down the loan" and "equity." Often these terms are used interchangeably, but they are not the same thing. You're only building equity if the home value is stable or increasing, otherwise you are subject to a 'net equity' which depends on the market value of your home AND how much of the mortgage has been paid down. As an equation: Equity = Home Value - Outstanding Mortgage Balance. In our example, if the home value drops by a mere $2,589 (only 1.5%) in the first year, your equity from mortgage payments is completely wiped out. 
Figure 4: Monthly amortization schedule for the first year. This concerns the mortgage payment only and does not include other sunk costs.
Now comes the argument about renting versus buying. The typical argument against renting, is that you are "throwing away" money and not building equity. This is entirely true, but with home ownership you are also throwing away money through interest, property taxes, insurance, and maintenance.

So what's the take away? You are throwing away $914/month and paying down your debt by $214/month for the first year when buying a home. If you are renting for less than $914/month then  buying a home is not cost effective, at least for the first year. As a further example, say you are paying $750/month for rent. Under that assumption, it would take 14 years before your rent cost and sunk home ownership costs were equal (see Figure 5). The point being, owning is NOT always better than renting. It depends on rental rates, how home prices are trending, and interest rates at the very least.
Figure 5: Yearly amortization schedule for the first 15 years. This only includes the mortgage.

Risks: Part III
As a new home owner your immediate concern is preservation of your home's value by minimizing losses and maximizing gains. In the current environment, minimizing losses is more of a concern and this can be achieved by managing risk with appropriate hedges. This starts by understanding your risks as outlined below.
  1. Home Value Falling: If the market turns south and your home value drops your equity can be wiped out rather quickly. Leverage works in both directions and is equally vicious. Prior to the housing collapse, falling prices weren't seen as a risk factor because "home prices have never fallen." Famous last words.
  2. Foreclosure/Default: If you lose your source of income, you're still responsible for all of the costs associated with home ownership. If you can't pay up, you lose your home, and if a short sale isn't possible, all the equity that you've built (if any) goes to the bank. If you are underwater, the bank loses. That's how a secured loan works.
  3. Liquidity: Home values rely on access to leverage through credit. If credit doesn't exist, demand is reduced, and prices fall, or you simply can't find a buyer in a reasonable time. Of course, a buyer always shows up if the price is right and your time frame is long enough.
  4. The 'flations: Stagflation, hyperinflation, deflation...take your pick. All of them are bad news for home owners. One might argue that hyperinflation makes it easier to pay off your mortgage with devalued dollars. That may be true, but only if you have assets to sell for dollars. This is one of the key components to managing your risk in the prevailing economic climate (see Part IV). In a hyperinflation, wages don't increase at the same rate. Wages are 'sticky' along with rental rates and other contract related cashflow structures. What does scale is highly liquid assets that can be revalued in a very short time to keep pace with quick price movements (i.e. gold & silver).
  5. Property Taxes: This may be somewhat odd to include, but it's certainly a risk as state and local governments are pressed to close budget shortfalls. States must have a balanced budget (unlike the federal government) and may resort to aggressive property tax increases to achieve that end.
Strategy: Part IV
  1. Find a Bargain: This is a buyer's market where homes can be found far below market value for a variety of reasons. Often it's a result of foreclosure or a desperate seller trying to get pennies on the dollar for their equity before the bank swoops in. At first glance, a good deal may seem like a no-brainer, but if the neighborhood is full of them, then the deal will become the norm, bringing down the value of 'comparables' and your home's assessed value. Let me explain a little further. Home prices are assessed by finding similar homes in a particular location and evaluating recent sales. If many homes in a particular neighborhood have sold at deep discounts then the 'comparables' that your home is assessed against will have a lower price, and in turn, your home will be assessed at a discount. Don't get caught in this trap. Look at Zillow.com and see what homes are selling for in your neighborhood of interest. If the area has been decimated by deep discounts, or numerous homes are for sale, be wary, especially if the latter is true.
  2. Avoid Fixers: Traditionally fixers have been a great way to add 'sweat equity' and flip the home for a profit. Don't try it. Material costs are increasing and the housing supply is saturated. If someone has a choice between buying a new home or fixed up home, well, 9 times out of 10 they'll pick the new one. Also, if the market turns south the capital invested into fixing a home may evaporate, putting you in a worse financial situation. Generally, you invest when a market is trending with you, not against. 
  3. Minimum Down Payment: When you initiate a home purchase you put two things on the line, 1. your credibility (credit score) and 2. your down payment. If you default, you lose your down payment and your credit score plummets. If you're suddenly underwater on your home, a strategic default may be a viable option. In the current environment it must stay an option. You'll want to put as little on the line as possible to minimize your losses should you have to take this route.
  4. Diversify Savings: This component is critically important and can actually be a real boon should hyperinflation, currency collapse, or strong inflation occur. I exclude deflation, because it would inevitably trigger a currency collapse or a hyperinflationary response. So how do you hedge your currency risk? Save 20% to put down on a home, or $35,000 in our example above but only apply 10% ($17,500) to the home purchase and convert the other 10% into physical gold and silver. In this way you have hedged your currency (dollars) with money (gold/silver) that is highly liquid. So how does this protect you? If the value of the dollar falls gold and silver will rise to compensate. Here's an example. Say your 10% goes entirely to gold and it increases by 6x like it did in the last decade as shown in this post. Now your $17,500 in gold is worth $105,000. If you went 100% into silver and it performed as it did in the last decade, it'd be worth around $175,000, enough to purchase your home outright. 
  5. Evaluate Home for Cashflow Potential: If you find a job in a different state or have to move for any number of reasons, it may be profitable to rent your home out. Vacancy rates are on the decline nationwide, which will put upward pressure on rental rates. If a lack of rental housing develops, you'd have a home to capitalize on that trend. Think like a business person and develop as many 'outs' as possible, becoming a landlord is one of them.
Words of Caution: Part V

The world is undergoing dramatic changes across a broad spectrum of areas including the monetary system, access to resources, aging populations, environmental destruction, and wars to name a few. In this environment anything can happen, and it becomes very important to manage your risk and to not be afraid of deviating from tradition. This isn't a time of booming economic prosperity where you can do no wrong. In the '90s this seemed to be the case with stocks where all you had to do was buy and hold. In the early 2000's it was a similar case with housing. Buy a home, any home, it didn't matter because the market was on fire. You couldn't go wrong. The equity and housing bubbles both ended abruptly and violently. Now we're in a debt bubble of epic proportions fueled by the lender of last resort---central banks around the world. At some point the bubble will burst, creating the greatest collapse of our lifetime. Though this sounds dire, it shouldn't keep you from living your life as you wish. If you want a home, can afford it, understand the risks, and have a plan to manage your risk, then do it. There's always a way to get to where you want, but you must be smart about it. Learn to anticipate and ride the tsunamis as they come, because they will come...

Resources: Part VI

Zillow.com - As mentioned several times before, Zillow is a great resource. You can check property taxes, estimated prices, evaluate homes sales, review previous sale dates & prices, and a number of other things. Explore it thoroughly if you're in the market for a home or just want to see how much your friends, bosses, or neighbors home is actually worth.

CalculatedRiskBlog.com - This is an excellent source for up-to-date charts on a number of economic indicators including housing. Here's a direct link to the charts gallery.

Wednesday, July 13, 2011

Silver Chart - Potential Breakout

The silver chart looks poised for a breakout based on the 50-day SMA crossover, which has historically (over the past year) indicated a change in trend from consolidation to a fast move breakout. The last barrier to a 'trend change' is the current consolidation channel represented by cyan in Figure 1. The channels have typically lasted roughly 3-months, with the current cycle approaching the end of its consolidation period. Either a strong breakout is in order, or continued consolidation. If the mining shares are a leading indicator, a breakout seems more likely, especially with QE3 expectations fueling the fire. The conditions are similar to the breakout that began in August of 2010 when there were rumblings of QE2. Anyway, stay tuned, it may get interesting.
Figure 1: 1-year daily silver chart. Notice the crossover of the 50-day SMA and the consolidation channel periodicity. Overall, there is a strong potential for a fast move should the chart breach $39.50 (click image to enlarge).

Thursday, July 7, 2011

Buying a Home - Things to Think About

Let's first get this out of the way, I don't recommend buying a home given the current economic conditions. The primary reasons for not buying are summarized below: 

  1. There are better assets that will yield a much better return (silver, gold, oil, agriculture etc.).
  2. There is still downside risk (i.e. prices may still fall 20% or more for various reasons). 
  3. The only direction interest rates can go is sideways or up. Sideways is what you want if you're buying. If they go up, home prices will have to come down. Rates can't go any lower thanks to the Fed. Overall, I expect rates to increase, and when they do, dramatically. Stay away from adjustable rates if you do choose to buy.
  4. High unemployment will force people to take jobs in various parts of the country. Home ownership thwarts mobility and it may be very difficult to sell if you need to move.
  5. The baby boomer generation isn't getting any younger, and as they age they will pass away or move to retirement communities, freeing up homes, and increasing  supply.
  6. Foreclosures are still occurring and shadow inventory continues to mount. This is producing a supply glut that the market isn't fully pricing in.
  7. Homes are a liability NOT an investment. They become an investment when they're producing cashflow through rent payments. This isn't '05.
  8. As commodity prices continue to increase maintenance costs will also rise.
Now the reasons for owning a home:
  1. Everyone needs a place to live. With that said, you have to compare prevailing rental rates to the the monthly mortgage, insurance, property tax, and maintenance costs associated with home ownership. Zillow offers a good calculator to find the 'inflection' point where home ownership may make sense. I'll elaborate on this in a subsequent post and detail how to manage your risk.
  2. Vacancy rates are declining and it's becoming more difficult to find a place to rent. The population is still increasing, but builders aren't building at a rate to sustain growth. This will cause rental rates to increase, likely reducing the home/rent ratio, and making home ownership more attractive.
  3. Interest rates are still historically low and financing is cheap, though hard to come by for some people. Just because rates are low doesn't mean you should buy, it just happens to be the case.
In a subsequent post I'll outline a strategy for buying that'll help you sort out costs and how to manage your risk. 

Monday, June 20, 2011

Careers of the Future - Take 1

Trending Sectors - Agriculture (grain stores at multi-decade lows, increasing populations, resource competition), Energy (everyone needs it, possible peak oil, increasing demand), Mining (gold and silver as money, resources to service Asian economies), Manufacturing (with a weak/collapsed currency labor will be cheap and US must export), Water Management (clean water technology especially in emerging economies), Transportation (energy crisis will require restructuring of the transportation system)

Declining Sectors - Finance (worldwide financial meltdown, round 2), Education (public funds decimated/higher education loan defaults), Medical (entitlement and federal funding collapse, baby boomer nest egg bust), Consumer Technology (waning demand unless Asia picks up with consumption), Computer Programming (increasing competition, India and China will be very competitive), Real Estate (until a sound production/manufacturing economy is established real estate will languish)

Engineering Disciplines (maybe a little biased here...)
  • Chemical Engineering - Renewable Energy, Water Management, Process Engineering, Electrochemistry, Nano Material Synthesis, MEMS & Microfabrication processes
  • Mechanical Engineering - Energy, Transportation, Aerodynamics, Manufacturing, Power Systems, MEMs & Microfabrication, Military Technology
  • Civil Engineering - Transportation, Building Energy Efficiency, Power Systems, Electrical Transmission Systems
  • Materials Engineering - Supports other engineering disciplines
  • Industrial Engineering - Supports renewed manufacturing base
  • Electrical Engineering - Power Electronics, Microelectronics (dominated by Asia)
  • Environmental Engineering - Water Treatment, Environmental Monitoring
Scientific Disciplines
  • Physics - I've always had a lot of respect for physicists, but it simply doesn't pay unless you go for the PhD in an applied area. Mechanical and Electrical engineers are generally sought after over physicists. Unless you're pursuing quantum or nuclear physics, don't bother pursuing this degree.
  • Chemistry - This discipline is making a comeback primarily on the backs' of chemical and biomedical engineering. As with any science degree, a PhD is preferred. You simply don't get the applied knowledge otherwise.
    Business
    • Finance - Though I expect a general collapse in the financial markets, I believe the international portion will eventually regroup and largely service Asian economies and their periphery resource suppliers, though there may be a period where paper assets collapse in their entirety. If/when this occurs a large portion of the financial sector will be decimated. Good riddance.
    • Management - This one is simple: 1) Be good, in fact, be better than the next guy. 2) Associate with the trending sectors and service or supply them in some way. 3) Be networked.
    Foreign Languages
    • Mandarin Chinese - It's no secret that the Chinese are becoming increasing wealthy and influential as a multipolar world continues to develop. With their increasing political, economic, and military might, an understanding of Chinese culture and language would be advantageous to entrepreneurs,  politicians, or generals depending on how the relationship develops.
    • Spanish - Latin America may become a more prominent player in international affairs through raw material and goods exports. In addition, the Latin population continues to grow at a robust pace.
    Vocational Disciplines
    • Accounting - Accountants servicing trending sectors will be sought after. Those who aren't will be unemployed. Experience and targeting specific sectors will be important aspects due to the relatively low barrier to entry for this discipline.
    • Machining - A good machinist is hard to find and refined skills take time to develop. This presents a natural barrier to entry. In addition, with an increasing manufacturing base machinists can expect to be sought after.
    • Farming - Raw production, renewable, continued demand. The barrier to entry lies in on-the-job training, access to resources, and a general lack of understanding by the general public. Overall, I expect farmers to do quite well, especially if they're producing exportable goods.
    At the end of the day thriving careers will center around things that produce dividends or that can be exported in some way. Individual job security will have a "barrier to entry" component due to high unemployment. This means that there will be a lot of people who want your job, and if they can learn to do it quickly and become more efficient than you, well, your job security will be reduced. The atmosphere will be extremely competitive where innovation and efficiency will be rewarded, assuming government intervention doesn't mute growth altogether. As far as service based careers, your market should encompass individuals who are in the trending sectors. That's where the money will flow from...

    Of course there are exceptions and at the end of the day you can make just about anything work if you do it well. With that said, swimming with the current is always easier than against, but it certainly can be done. 

    Sunday, June 5, 2011

    Silver - Rising Triangle Formation & 50-day SMA

    An updated silver futures chart is provided below with the addition of a bullish ascending triangle formation that terminates near the end of June 2011. Based on the recent dip buying, steady volume, and gold's resilience, I would expect a break upward into the $40s by the end of June. Notice that the top portion of the triangle coincides with the flattening 50-day SMA, which has been acting as resistance. Essentially, we'll have up to three weeks until the trend moves decidedly upward or the triangle formation is broken and we continue to consolidate sideways in time.

    With that said, the next FOMC meeting takes place June 21st-22nd and QE3 expectations will be brought to light within the same 3-week time frame as the ascending triangle develops. Overall, there is the potential for a very strong breakout should the bullish triangle hold, and the continuation of QE is confirmed by the Fed. Even the willingness to continue QE should provide the catalyst for a fast breakout move similar to what was seen in August of 2010.

    Figure 1: Silver Futures, SI_F, daily chart with prevailing "QE trend" (orange), 50-day SMA (purple), 200-day SMA (dotted purple), Fibonacci retracement (cyan), and ascending triangle (bold gray).
    Recap
    1. Bullish ascending triangle formation, 
    2. 50-day SMA acting as resistance, 
    3. Expect move into $40s by July, 
    4. FOMC meeting June 21st-22nd 2011, 
    5. Gold & Silver options expiry June 27th 2011.

    Price Expectations 
    1. Resistance at roughly $39.00-$39.50,
    2. Lower support at $32.50-$33.00, possible support developing around $35.00-$35.50,
    3. Consolidation in the $33.00-$39.50 range, or breakout into the $40s. Conditions seem to favor breakout into the $40s.

    Overall, the next month will be a defining period for the silver market. Stay tuned...

    -------------------------------------------- Update: 6/9/2011 -------------------------------------------- 

    Figure 2: Silver Futures, SI_F, daily chart with prevailing "QE trend" (orange), 50-day SMA (purple), 200-day SMA (dotted purple), Fibonacci retracement (cyan), and pennant formation (bold gray).


    -------------------------------------------- Update: 6/13/2011 -------------------------------------------



    Figure 3: Silver Futures, SI_F, daily chart with prevailing "QE trend" (orange), 50-day SMA (purple), 200-day SMA (dotted purple), Fibonacci retracement (cyan), and broken pennant formation (bold gray).


    The pennant formation has been broken and we'll have to wait and see if $32.50-$33.00 is the next target. It looks as though we have entered into a shallow downtrend in the short-term, or a consolidation phase around $34-$35.

    Saturday, June 4, 2011

    QE3 - The Discussion

    Fed Chairmen Ben Bernanke: "I'm not crying because
    I'm a failure, really. I just got something in my eye."
    The QE3 debate continues to rage with a few weeks until the scheduled end of QE2, this should get interesting. Of course, the multi-trillion dollar question is: Will the Fed end QE2 on schedule or begin a new iteration of easing (aka QE3/Money Printing)? Scenario 1 was previously discussed and can be found here.

    The FOMC meeting will take place June 21st-22nd 2011. Here are the possible outcomes and  potential ramifications:

    Interest Rates
    The Federal Reserve will most likely reiterate its stance on interest rates saying that they'll keep them low for an extended period of time, but will also indicate its willingness to increase rates at a time in the future. It's possible that the Fed may even hint toward a time in the future that it will consider increasing rates. Of course, the objective will only be to give the impression of a hawkish stance. In reality, rates will be kept low for a very long time.

    Why? There are few calls to modify the Fed rate as it's taking a backseat to the QE discussion. It would be something like putting the cart before the horse. Also, with a weakening economy, an increase in rates would put pressure on lending, deficit spending, the Fed balance sheet, and the economy as a whole. If the Fed raises rates and the economy deteriorates the Fed will be blamed. To summarize, the options are as follows: 
    1. Rate Increase: The economy will slow, the Fed will be blamed, the broken economy will be exposed, further confidence will be lost by the general public, fiscal or monetary stimulus will eventually be called for (especially in an election cycle), commodities, housing, and lending will take a tumble. Essentially, all the 'progress' made thus far will be lost very quickly. Please be aware that I'm using the word 'progress' extremely facetiously. Overall, a rate increase is extremely unlikely.
    2. Rates Unchanged: This is the most likely outcome with the best short-term risk/reward structure, at least in the Fed's eyes. Nothing changes, lending is muted and inflation continues to bleed into the economy at a moderate rate. I expect rates to be unchanged, but accompanied by a somewhat hawkish tone to counter a re-deployment of QE and the inflation expectations that will follow.
    3. Rate Decrease: The Fed can't lower rates any further, hence QE.
    Scenario 1: QE2 Ends on Schedule - No more QE?
    In this scenario the appetite for treasuries will wane and rates will be forced to increase, essentially countering any low rate policy. Eventually this will begin to affect the greater economy, produce a slowdown, and possibly push the US back into recession (at least officially). This, however, is a catch-22 situation. If rates increase the debt levels will also increase as a result of an economic slowdown, which would result in a reduction of gross receipts, an increased deficit, more debt issuance, and of course some entity would be required to buy the new and mounting debt. That entity would likely be the  Fed, and guess what that means...more QE. To recap, the cessation of QE2 makes QE3 certain. With that said, there can be a time lapse between the two programs and that's really the only question.

    Now for the caveat. A crisis causing a flight to the dollar (war/terrorism) or a game changing technology have the ability to boost treasury demand (for the former) or produce organic growth (for the latter). The crisis card has been played before, but its effectiveness has significantly deteriorated over the years and any crisis would likely support gold rather than the dollar. In addition, a flight to the dollar would only be a temporary phenomenon without underlying fundamentals supporting it. This is where organic growth would have to take hold by way of a game-changing technological innovation that can be brought to market rapidly. Unfortunately this doesn't look likely with the state of the economy and no technology that fits the bill.

    Overall, ceasing QE2 guarantees QE3, barring organic growth brought on by game-changing technology and economic restructuring. With that said, there may be a time lapse between the two programs.

    Scenario 2: QE2 Ends, QE3 Begins...QE to Infinity
    If QE3 is initiated completely above-board and immediately following QE2 there is a real risk of stoking runaway inflation expectations. This would be met by a loss of confidence in the dollar (at least what's left) and a widespread move into real assets, especially gold and silver. With that said, expectations can be managed to a degree by rhetoric, program size, and program duration. In addition, the exchanges have recently shown that they can and are willing to affect commodity prices by implementing margin increases and squeezing liquidity out of the futures market. Of course, the effect is always short-lived as the fundamentals inevitably catch up.

    Overall, the Fed is expected to implement QE3. The parameters that they can play with are: program size, duration, timing, and name (call it something else). The Fed may also be willing to lean on exchanges to manage commodity prices.

    Likely Scenarios: QE3 Lite or QE3 Late

    Possible FOMC Statement #1 (Mostly Cut & Paste): 
    The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.
    The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $XXX billion of longer-term Treasury securities, at a pace of about $XX billion per monthThe Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted. 
    Synopsis: Rates are kept low, immediate program continuation and a small initial program with short-duration expectations.

    Possible FOMC Statement #2:
    The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.
    As previously announced, the Federal Reserve’s purchases of $600 billion of Treasury securities will be completed by the end of June 2011The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the third quarter of 2011. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. 
    Synopsis: Rates are kept low while the program winds-down with an option to continue later in year.