Question from a reader

Comment to the blog "Off the cuff" (see below): Whatever happened to the mantra the markets always win?

It was exactly the point of my blog. The markets always win. The chaos we are in is happening because the markets are winning. The government created distortions and the markets are now uncovering these distortions.

You cannot buy houses if you do not have the money to pay...even if the government is sponsoring the trade. You cannot set interest rates below inflation and hope that everything is fine and inflations remains tame. You cannot lower interest rates below 1% and hope the markets are not going to take advantage of it.

Yes...the markets always win...always.

More, much more when you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Off the cuff

The world is struggling because of the excesses of the central banks trying to fix yesterday’s problems. The crisis is obvious ….. from New York to Sydney.

I cannot fail but think about Karl Marx’s prophecy….capitalism will collapse because of the absurd concentration of financial power. (What he missed is that any system will collapse under the concentration of any power….see what happened to the USSR).

No system can survive without the proper supervision of the government. Once the government fails to perform this important function, any political and economic system will collapse.

We are witnessing a tragic unraveling of the mistakes and blunders of the US central bank trying to avoid deflation in 2002 and the idea of the US government that anyone should own a home without having the money to pay (a democratic catastrophic dream).

We are paying the price. There is going to be a huge transfer of wealth from the private to the public sector. We have no choice. This is what is dramatic.

I agree with Popper (a contemporary philosopher). The purpose of the government is to set the rules of the game. Once the rules become bastardized, we will eventually have to pay the bill.

This is what is happening now. It is not the fault of the republicans or democrats. Our institutions have failed us.

What can we do? Nothing. As we move from one problem to the next we have to learn how to survive. Eventually the government will become so big that will create other problems. We do not know which ones.

The answer? Be flexible in what you believe in. The rules of the game are being re-written every day.

More, much more when you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Spreads rising. Bad news.

Yields on speculative-grade bonds rose to distressed levels for the first time since 2002 as the turmoil sweeping Wall Street led investors to shun all but the safest government bonds.

Investors demand 10.25 percentage points more in yield to own junk-rated securities than Treasuries, according to Merrill Lynch & Co.'s U.S. High Yield Master II index. Bonds that trade at a so-called spread of 10 percentage points or more are considered distressed.

The last time spreads were so wide was in the aftermath of Enron Corp.'s collapse earlier this decade. Now, a slowing economy and failures of some of the largest U.S. financial institutions are driving investors away. Distressed bonds default within one year 22 percent of the time, compared with 1 percent for non-distressed junk bonds, according to Fridson Investment Advisors in New York.

These spreads have to come down. The dollar has to strengthen. The stock market has to rise. Only then will the economy find a bottom. Not until then.

More, much more when you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Important indicator is sinking

A global recession? The Baltic Exchange Dry Index is tumbling (click on graph to enlarge). There is only one reason. Fewer commodities are shipped. Why? You guessed it. The global economy is slowing down in a meaningful way, as shown in our monthly report "The Global Business Cycle".

More, much more when you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Watch the dollar

Excerpts from Bloomberg.

The combination of spending $700 billion on soured mortgage-related assets and providing $400 billion to guarantee money-market mutual funds will boost U.S. borrowing as much as $1 trillion, according to Barclays Capital interest-rate strategist Michael Pond in New York.

``As we get to the other side of this, the dollar will get crushed,'' said John Taylor, chairman of New York-based International Foreign Exchange Concepts Inc., the world's biggest currency hedge-fund firm, which manages about $15 billion.

If these experts are right, gold and hard assets should remain part of your portfolio.

More, much more when you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Something very dangerous is brewing

Some thing dangerous is brewing. It is the belief that our problems are created by the markets and speculators.

Make no mistake about it. Financial markets are an essential component of the growth of any country since day one. It is one of the four main pillars of a growing and expanding society.

In his brilliant book "The Birth of Plenty", W. J. Bernstein shows why every successful society in history had four essential features working for them.

1) Property rights to stimulate and protect investors.
2) Knowledge and research to develop new ideas and new discoveries to improve the standard of living of the society.
3) Communication and transportation to bring products and people together.
4) Financial markets to finance growth and the new discoveries.

The stagnating or fading economies fail this test. Make no mistake about it, our recent attempt to change the nature of the markets by forbidding shorting or believing that the cause of rising commodities is speculators is seriously misguided.

It is ludicrous to think that the markets are efficient when commodities like oil and gold sag. But speculators are forcing their rise.

The markets are driven by government policies and the role of politicians in a society. The misguided policies of the Fed after the 2000 bear market are the main cause of our problems. Cheap money crates volatility. This time is no exception.

More, much more when you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Thought of the day

There is a momentous transfer of power and wealth from us to the bureaucratic structure of this country. I recognize they had to do what they had to do to save us from disaster. The trends, however, are in place and are irreversible.

It is no coincidence, as I noted here a few days ago, that gold and oil are strong and the dollar is weakening.

There is a a sense of inevitability in the way human events develop. They tend to increase the power of some classes at the expenses of other.

Meanwhile, opportunities are created. But you have to be in the right asset classes.

More, much more when you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Watch the reaction of the markets

The markets will speak...soon. Will the action of the the government be inflationary?

The answer? Watch what is going to happen to the markets. A decline in the dollar and a rise in commodities (gold and oil included) suggest the markets believe the move is inflationary. It will stabilize the market in the long run, but a bigger and more intrusive government, slower economic growth, and higher than average inflation is the price we will have to pay.

The good news is if instead we will experience a strong dollar and stable commodities. In this case the markets perceive the move as non-inflationary.

Time will tell. Stay tuned.

More, much more when you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Business cycles and stock sectors

The strongest sectors in the past several months have been those that have shined consistently during weaker economic conditions. Commodities and "cyclical" sectors soar when the economy booms. The rules of the game change when the economy begins to grow at a below average pace. Commodities and "cyclicals" under perform during such times and others take the lead as interest rates decline and money is cheap.

Investors need to recognize the powerful business cycle forces. It is the only way to survive.

Overhanging the forces of the business cycle is the level of real interest rates. Money is cheap. No question about it. The rate on 13-week Treasury bills is less than 1% while inflation is at least 5% (depending on how you measure it). The implications is that the system has an inflationary bias.

More, much more when you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977

Momentous events

What do I think?

Read my blogs. Financial crises are excellent buy opportunities. But you have to be selective and play the business cycle consequences.

The dollar weakened, commodities strengthened, oil strengthened, energy trusts (we follow closely) soared, energy stocks jumped. Financials will continue to benefit, but what is happening is inflationary in the long run.

Have fun. But be careful.

More, much more when you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977