Commentary for the Week of March 8

[Ever consider stuffing money in your mattress to guard against a banking collapse? Here’s a guest editorial from our friend Erich Simon that suggests you might be better off taking your nest egg and buying…a bunch of mattresses. We’re not sure whether Erich’s point is being made tongue-in-cheek, but we are convinced, after an exchange of several e-mails, that he is a true connoisseur of bedding and accessories.  RA] I just shelled out $2,400 for a traditional, coil-spring twin XL mattress set. Apparently I am not alone with mattress horror stories. Is the new mattress worth $2,400? I don't know, but it's got a 10-year warranty. Only problem with that is a $2,400 replacement mattress in ten years will be a smidgen of what I just received.  Adjusted for Net Present Value and the ongoing bleed of “quality metric,” probably a lot less, so for all intents and purposes my purchase will have depreciated down to sub-zero. Of course, if I were buying the hedonic of a new computer ten years out I would no doubt improve on existing “capacity.” A mattress is a better barometer than a computer or a traditional store of value, including gold. Mattresses consume scarce resources like cotton and petroleum. Mattresses are something everybody needs, and they wear out and have to be replaced. Mattresses are not purely “frivolous tangibles” and speak to the Means of Production (MOP) in our factoried society. They are price-pointed to exhaustion on the demand side. Labor costs, like everything else, while in the short term can fall from layoffs, will only continue to rise as increases in the minimum wage are passed through the pipeline. Acquiring 20/20 economic vantage starts by ranking each of the millions of products and services on a “necessity-luxury” scale and regularly updating the ratings

If DaBoyz can squeeze a 500-point Dow rally out of yesterday’s administered easing of dollar “swap” rates, just imagine what they can do with a little Santa seasonality and a dollop of year-end window-dressing.  Let’s be straight about a couple of things. First, no one expects the latest easing of global credit lines to resolve Europe’s debt crisis. And second, the 800 points the Dow has tacked on this week represent little more than trading machines masturbating each other amidst a short-covering panic. Some observers merely yawned, noting that the swap arrangements that make it easy and cheap – and now even easier and cheaper, if such a thing were imaginable -- for foreign banks to borrow dollars have been in place since 2007.  However, others saw the announcement by the central banks as nothing less than a bold step by the Federal Reserve to begin monetizing the debt of Spain, Italy, Greece, France et al. It’s a moot point whether the U.S. has begun bailing out Euro-deadbeats, however, since the U.S. is a deadbeat itself, albeit one in sole possession of the world’s reserve currency and therefore of the ability to gin up unlimited quantities of the stuff at will. Meanwhile, there’s little point in pretending that the U.S. is somehow not immersed in the bubbling cauldron of toxic global finance. U.S. banks had stopped lending to their European counterparts, and that’s why the Fed stepped in to pretend it has the situation under control. This may work for another week or so, if that long, but it’ll be interesting to see whether reducing swap rates to near-zero will help suppress sovereign borrowing rates that recently topped the 7% “red zone” for Italy. Would you lend the Italian government hundreds of billions of dollars at 7%? That’s what we

Because securities markets sometimes do crazy things for stretches of days, weeks or even months, Rick’s Picks seldom attempts to reconcile seemingly contradictory forecasts for trading vehicles that are related, such as crude oil and gold (more on these two in a moment).  Nor do we seek to explain the ups and downs of stocks, bonds and commodities by connecting their frequently nutty behavior to events in the even nuttier world.  That futile task we leave to The New York Times, The Wall Street Journal and their ilk, since they are in the business of selling news as something that matters greatly, particularly to investors. It is with the foregoing in mind that we came to contemplate a seeming fork in the road for crude oil and gold. On the charts, the former looks like it’s about to blast off, while the latter seems bent on screwing the pooch for the remainder of 2011. We said as much in the headline that topped yesterday’s commentary:  Doomed Rally in Stocks Could Cap Gold’s Surge. Doomed may have been too strong a word – we did write a column for a Hearst paper for a few years, remember – but bulls could hardly have been encouraged by the egg the broad averages laid yesterday after having rallied nearly 300 points the day before. A few denizens of the Rick’s Picks forum (click here for a free seven-day pass that will also give you access to our detailed daily forecasts and trading recommendations) thought that stocks were simply taking a rest, but we saw them as relapsing into the quagmire of global problems. The most bullish story out there at the moment – bullish, that is, for everything but the U.S. dollar and Treasury paper – is that Helicopter Ben is about to

We have our doubts that bullion prices are about to embark on a major rally, since yesterday’s admittedly encouraging upthrust was tied to a stock-market rampage that, having occurred for all of the wrong reasons, is doomed to fail.  It was in fact a quite nasty bear squeeze that sent stocks soaring overnight. The short-covering panic was triggered by rumors -- later denied – that Italy was about to receive an $800 billion bailout.  There were also some news stories over the weekend suggesting that Americans had done their patriotic best to kick off the holiday shopping season with a bang. These two news items, even without confirmation of Italy’s rescue, caused index futures to leap wildly higher Sunday night, all but guaranteeing that the Dow Industrials would open up at least 200 points on Monday morning. This they did, achieving an intraday peak 330 points above Friday’s settlement. Would-be stock traders found themselves choking on dust Monday morning, however, since the gap-up opening left no opportunity to get onboard. Even so, via actionable advice disseminated Sunday night, Rick’s Picks subscribers could have caught a profitable ride in Comex December Gold. Here’s the trading “tout” exactly as it went out at around 8:30 p.m.: Europe's latest bailout, this time for Italy, has goosed the futures into a steep climb. Use 1712.50 as a minimum upside target for now, keeping in mind that anything above that would suggest that plenty of buying power remains to be spent.  For camouflage purposes, you can try getting long if, on the 15-minute charts, the futures create an A-B impulse leg by exceeding the 1708.90 peak from last Wednesday without taking out the more obvious one at 1710.80.  This was occurring as we went to press. ‘Camouflage’ Trading Ultimately, we exited the trade with a

Reports of shopping-related violence over Thanksgiving weekend were so appalling that one might infer that Western civilization itself had slipped yet another notch, much as it did when Paris Hilton and Kim Kardashian became world famous for sharing their fellatio techniques online. On Friday, a female shopper hell-bent on snaring a video game at a ridiculous price pepper-sprayed other bargain-bin ghouls to frighten them away. There was also a robbery-shooting in a mall parking lot, as well as numerous other incidents that, taken together, suggest that the annual kickoff to the Christmas shopping season has become as violent and rapacious as an 1880s land-rush. We wonder whether this aspect of our consumer culture would have evolved as it has if the news media had not been pitching the “Black Friday” story ad nauseum over the last ten or fifteen years. It was already a sad fact of our consumer culture that the question of whether we would have a “green” Christmas had become an obsessive concern of the news media.  Has the U.S. economy become so enfeebled and dysfunctional that it cannot survive without a Christmas-induced binge of credit card shopping?  The answer, apparently, is yes.  Meanwhile, the news media must bear much of the blame for whipping buyers into a frenzy. With the country slipping back into recession, newsroom hacks are doing everything they can to give advertisers a boost. But at what cost to our humanity? Is That Really Us? Still, it’s difficult to know for certain whether the strip-mall underclass that we read about in the newspapers is actually us.  If so, the hard times that lie just ahead are going to be even harder on us all now that the last shred of decency and politeness appear to be disappearing from public life.  Or are they?

[Our good friend Doug B., a financial advisor based in Boulder, CO, has done well for his clients by keeping them heavily weighted in bonds. In the essay below, he explains why he intends to stick with this strategy even though many of his peers expect a rebounding stock market to outperform fixed-incomes in the years ahead.  For Baby Boomers in particular, the deflationary trend that buttresses Doug’s strategy holds stark implications.  RA] I was prompted to write this comment by the fact that, through Q3 of this year, the total return performance of long-term Treasury bonds has exceeded the performance of the stock market for the trailing 30-year period that began in 1981. I began my career as an "Account Executive" at Merrill Lynch in 1977 when brokers were leaving the business to drive taxicabs. It is a bit startling to think that the "benchmark risk-free long term asset" has won the race for practically the whole time. I have had the opinion for some time that there are better risk-adjusted, total-return opportunities in the bond market than in the stock market. Consequently, I have favored bonds over stocks in my asset allocation recommendations to most clients -- regardless of their risk tolerance or investment objective -- since well before the stock market peaked during the Tech Bubble in 2000. For investors who have a more aggressive capital appreciation objective and higher risk tolerance, I have recommended bonds with very long maturities. For investors who are more inclined toward the stable-income and preservation-of-capital objectives that are more commonly attributed to fixed-income portfolios, I have recommended somewhat shorter maturities. In the final analysis, the prevailing economic and market conditions over the past 12 years have been extraordinarily volatile because of the extreme influence of credit bubbles. Locking in safe income

We view yesterday’s stock-market plunge as unrelated to the failure of the not-so-Supercommittee to compromise on a paltry $1.2 trillion in budget cuts over ten years. No one expected a deal in the first place, and even if there had been one, its effect on the economy, let alone on the deficit, would have been negligible. Who would ever have believed even a decade ago that a “mere” trillion dollars in Federal outlays would hardly be worth arguing about? Still, the way stocks fell, one might have inferred investors actually cared about the outcome. The nightly news pretended it mattered, perhaps because there were no titillating alternatives to serve up on a slow-news day. Wall Street did its patriotic bit as well, feigning concern by sending the Dow Industrials 250 points lower. In fact, there was bound to be a little knee-jerk selling by institutional traders fearful that their competitors would be selling “on the news.” In our view, markets are driven higher, lower, and sometimes nowhere by mysterious cyclical forces that we will never quite understand. Moreover, it is the cyclically driven price swings that color our perceptions of the news, not the other way around. Trumped-up headlines aside, one thing likely to send a wave of genuine fear through Wall Street is the impending failure of Europe’s deadbeats to get Germany to bail them out.  And, make no mistake, it is only Germany that could be imagined big enough to pass itself off as a credible savior for all of Europe. France is usually treated as Germany’s co-equal in bailout discussions, but in fact France is not a significantly better credit risk than Italy or Spain at this point. Under the circumstances, the unelected bureaucrats who purport to manage Europe’s affairs are hoping to gain support for a

[We used to think Nobelist Paul Krugman was the Looniest Economist in America, but Rutgers professor James Livingston recently emerged as a solid contender with an absolutely dumbfounding op-ed piece in the New York Times that said, essentially, that America’s wealth has come mainly from Government spending and consumption, not from savings and investment.  In the essay below, we give our friend Edward Furst, a member of Young Americans for Liberty, a rebuttal opportunity. RA] We all know that the New York Times isn’t exactly a bastion of free-market thinking. But a recent op-ed by Rutgers Professor James Livingston, a guy who makes Paul Krugman look like Milton Friedman, went beyond the pale of economic sanity.  His basic contention is that economic growth comes, not from private investment, but from “consumer debt and government spending.”  Livingston points to the increase in per capita GDP over the last century despite the relative atrophy of private investment as a percentage of GDP, the growth in government spending, and the general increase in consumer debt. Here we encounter the age-old conundrum of historians unschooled in economic thought (Dr. Livingston has a bachelor’s degree in British and American literature, a masters degree in Russian history, and a doctorate in American History). In a rebuttal to this op-ed, George Mason University Ph.D. economics professor Don Boudreaux aptly noted that “Because each dollar successfully invested raises GDP by multiple dollars, net-investment’s decline as a share of rising GDP… is evidence of the impressive success of private investment…”  But even this analysis seems to take for granted the efficacy of Gross Domestic Product as a viable metric of economic performance. Building Keynes Monument Imagine for a moment that the Federal Government had embarked on a “stimulus” program to erect a giant obelisk commemorating the life’s work of

[How much longer can Europe and the U.S. postpone the global financial system’s collapse? We doubt that the chicanery that has sustained it so far will see us into the New Year. In the essay below, Rick’s Picks contributor Erich Simon sees an epiphany coming that could reshape the face of modernity.  RA] There is a beginning and end to everything, and I find it interesting that Italy and Greece, two of the oldest, are “winding down” as expressed by their financial dredge. Meanwhile, the countries to the north, whose social thrust is mediated by harsher environments, continue to service existing loans into managed growth and a semblance of balance. The debt game is all about growth into a finite environment. We are witnessing countries at the margin of both demographic and cultural surge beginning to falter. Perhaps this is indictment that nothing can last forever because the universe doesn't allow for that;  like immortality, it would never allow for “turnover” or “progress.”  How many Michelangelos before it's time to move on? No one has a better sense today that the human race has collectively extorted its environment than the countries facing debt-based Armageddon. Quality of life is diminishing right in front of our eyes. The EU is fracturing like the Hatfields and McCoys. While humans are quintessential adapters to change, which is the only thing certain about the universe, the change is ramping into the span of one generation, so that we are all, young and old, witness to a larger social awareness. A deep seated sense of loss comes from our recognition that the world of yesterday was preferable to that of today. That toying around in your living room behind a game console is a mockery of the physical adventures enjoyed by our recent past. That the