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Quote of the Day

Friday, March 02, 2012

March 2, 2012 -- Remember all the writing I've done promoting the magic of compounding? That's really what Warren Buffet does. He buys companies that throw off dividends, and then he reinvests the dividends on new dividend-prone companies. Buffet doesn't care what his company does or makes (insurance, candy, freight hauling) as long as it throws off dividends every year. Buffet knows numbers, and he knows compounding. That is why he's rich.

 

The US is now facing compounding in reverse. Our national debt is $15 trillion, plus another $565 trillion that we owe in the future. The debt is compounding at the lowest percentage figure ever, less than one percent on our Treasury bills.

 

Those people who remain in cash or have their money in short-term government debt are being robbed by inflation or the loss of purchasing power in their money. Buffet knows this, and he realizes that to stand still he has to bring in about 5.5% on his investments.

 

Buffet knows that if he stays in cash, he's losing purchasing power. Thus, as know, when he is loaded with cash he announced that he is looking foe big new acquisitions. He's back to compounding.

 

Recently in a speech Bernanke stated that the US is on "an unsustainable fiscal path." So what does Bernanke really think? He thinks I'm just the Fed Chief for a term or two, and there's nothing the Fed can do about US spending and debt. So I'll give my warnings and when my tour of duty is over, I'll go back to S. Carolina, and just keep on living.

 

I often sit back and wonder, "What's the big overriding problem or phase that is happening today? What are we actually living through?"

 

I personally think what we're seeing in terms of the big picture, is the rise of China. For decades China was looked down on by other leading nations -- Russia, Japan, Germany, the US. Now China wants to be seen as an equal with the leading nations of the world. After all, China has a massive population of 1.3 billion people, and today China has more monetary reserves than any other nation on earth (over three trillion dollars).

 

China believes in precious metals, particularly gold. China is today the world's leading producer of gold and the world's number one accumulator of gold. China is the world's leading miner of gold, and every single ounce of gold that is recovered in China must be turned over to the government. No gold (as is the case with France) is allowed to leave China.

 

My thinking for a long time is that China means to own the world's reserve currency. How will they do this? They will do it by allowing the yuan to be used exclusively with an increasing number of their trading partners.

 

Furthermore, in due time China will partially back their currency with gold. They will peg gold at such a high price that no one will trade in their "junk" fiat currency for gold, gold will simply be "too expensive." If you want to trade your fiat dollars for gold, the price of the metal will appear prohibitively high. It will take too many of your hard-earned fiat dollars to buy an ounce of gold. But the yuan will be backed perhaps by 20% gold. It will therefore be a stable an much-wanted currency -- in time the yuan will be the world's most-wanted currency and therefore the world's new reserve currency. With the dollar losing its reserve status, the US will no longer be able to create (out of thin air) its own reserve currency; the US dollar will no longer be accepted "out of hand" in repayment of its international debts.

 

When that happens -- then what? America's creditors will insist on taking property or gems or companies or various tangibles in payment for debt that we owe. That will be the price we pay for being the planet's greatest nonstop debtor.

 

As for the stock market, it looks to me as though Dow 13,000 has become an almost impenetrable upside barrier. Again and again the Dow slams against 13,000, only to be turned back each time. Of course, this may change, and we may see the Dow climb above 13,000 and from there move higher. I'll believe it when I see it, but so far it just hasn't happened.

 

Keep your eye on China and its yuan, and keep your eye on gold.

 

TODAY'S MARKET ACTION:

 

My PTI was down 2 at 6385. The moving average at 6347, so my PTI is bullish by 38.

 

The Dow was down 2.73 to 12977.57.

 

Transports were down 51.35 to 5160.13.

 

Utilities were up 0.55 to 453.75.

 

NASDAQ was down 12.78 to 2976.19.

 

S&P 500 was down 4.46 to 1369.63.

 

There were 1007 advances and 2021 declines on the NYSE.

 

There were 112 new highs and 16 new lows.

April light crude was down 2.14 to 106.70.

 

Total Volume on the NYSE and associated exchanges was 3.3 bn.

 

Bonds: Yield on the 10 year T-note was 1.98. Yield on the long T-bond was 3.11. Yield of the 91 day T-bill was 0.066%.

 

Dollar Index was up 0.63 at 79.41. Euro was down 1.10 at 132.06. Yen was down 0.10 at 122.25. Currency Prices as of 1 PM Pacific Time.

April gold was down 12.40 to 1709.80. May silver was down 1.13 to 34.52.

 

My Most Active Stocks Index was up 5 at 300.

 

The Big Money Breadth Index was down 2 at 1020.

 

GDX was down 1.10 at 54.79.

 

HUI was down 10.56 to 523.38.

 

CRB Commodity Index was down 3.15 at 321.17.

 

The VIX was up 0.03 to 17.29.

 

Permanent Portfolio Fund (PRPFX) was up 0.25 at 49.13 (previous day closing). YTD Return: 6.60%.

 

Late Notes -- Prices seem to be nailed fast to the wall of the New York Stock Exchange. Dow closing again under 13,000. April gold closing again above 1700.

 

Have a quiet and stress free weekend.