What is Potash? Why You Should Care

The Greenspan Put Lives On

As economic indicators weaken and the stock market drops, the world looked to Fed Chairman Ben Bernanke for relief, and they got it. In a speech on Friday Bernanke channeled Greenspan and let us know that he would do whatever it takes to ensure economic recovery.......the Greenspan Put lives. Given that Big Ben can't lower interest rates anymore, he has no other choice but to print money and buy assets.

Greenspan created this boom-bust cycle by always coming to the rescue of Wall Street (called the Greenspan Put), Bernanke has continued these dangerous policies.

How far will Bernanke go? Will he destroy the currency to save Wall Street? I don't know, but it appears that he will. We have a serious situation on our hands - Wall Street continues to be in charge, financial reform was a joke and our financial system is worse off today than ever.

Some traditions are great, the Greenspan Put is not one of them. It's time to end the Greenspan Put, ousting Congress is not enough, we need to abolish the Federal Reserve.

Scott Dauenhauer CFP, MSFP, AIF

Oil-Eating Bacteria Go To Work

I'm in the crowd that thinks what happened with the BP oil spill was ridiculous (of course, who doesn't), however I also feel like the whole story has not been told. This piece from Discover Magazine demonstrates how a group of bacteria have arrived on the scene (all on there own by the way) to start eating the oil and making the waters clean again....what? Its true, here is an excerpt:

In the Gulf of Mexico, nature’s janitors are hard at work, mopping up the aftermath of a man-made disaster. On 20 April, 2010, an explosion at the Deepwater Horizon rig unleashed the largest oil spill in US history. Now, a team of American scientists led by Terry Hazen have shown that just a month or so after the incident, a microscopic clean-up crew had already started to digest the mess.

The ocean is home to many groups of bacteria that can break down the chemicals found in crude oil. Some, like Alcanivorax, are oil-eating specialists that are usually found in low numbers, only to bloom when oil spills provide them with a sudden banquet. That’s exactly what has happened in the Gulf of Mexico. Hazen has found that these oil-eaters have swelled in number in the contaminated waters.

Why is this important and why is this story appearing on a finance blog?

Oil is quite simply the lifeblood of our prosperity - think about your life as it exists right now if there were no oil or if oil were $15 per gallon. I'm not much of a fan of the stuff and am in the crowd that believes we MUST find a more attractive option for fueling our prosperity - one that is renewable, clean and cheap. But the fact remains that until we find such a fuel - we need oil to provide a bridge. If you think the economy is bad now, just wait till oil is $5 or $10 or $15 per gallon. Sure, it might force a switchover to something else - but the short-mid term pain would be nightmarish. My point? The oil spill has caused us to think that we can't drill for oil offshore, this leads to less oil discovery and less oil.....which without a corresponding drop in demand means higher oil prices. We need drilling, even if you hate it, we need it. These bacteria might be part of our solution to the problems that we will experience in the future when we drill.

Scott Dauenhauer CFP, MSFP, AIF

Confirmation and Encouragement

The economic data coming out over the past few weeks is confirming what I've been writing for quite sometime, we never escaped recession and in fact never had a recession - we had and have a depression, albeit one that has been goosed by massive government intervention to make a recovery appear to be happening. We have never dealt with the underlying issues that have caused and continue to cause our weakness, instead we have doubled-down and now we are in a double-dip....

If you are like me though you might be getting tired of all the bad news and negative stories. By no means do I think we should ignore our issues, but as I've stated in previous commentaries, good will eventually come from bad. Just look at the progress we've made SINCE the Great Depression. So....for some encouragement I present to you John Mauldin's "Good News" from his recent "Thoughts From the Frontline," a must read weekly e-newsletter.

Enjoy,

Scott Dauenhauer, CFP, MSFP, AIF

John Mauldin:

So Where's the Good News?

Ok, I could go on for hours, sorting through the problems. Where is the good news I promised?

Here's what I should have said to Tiffani's group: Let's face it. Running a small business is never easy. I am a serial entrepreneur. I have started and run a lot of very different businesses. Some have been very, very good and some went down in spectacular flames. I can remember some near-death experiences when the economy was booming. I have watched a million-dollar income stream dwindle to zero and there was not a damn thing I could do about it, except enjoy the money while it was there and use it to buy the next income stream. I have had to rebuild several times from scratch as markets shifted drastically underneath my feet. And I've changed directions as new opportunities revealed themselves.

In all this I'm like every other small-business entrepreneur out there. It is never easy. But that is what we do. We get up in the morning and figure it out. Some 80% of startups die within ten years. But we pick ourselves up and start over.

I know unemployment is 10%. But that means almost 90% are employed. Consumers are saving more. So adjust. Figure out what your New Normal looks like.

The '70s were a bitch. I woke up many times in the middle of the night with real pains in my stomach wondering whether to pay the rent or make payroll. So did a lot of people. But look at all the new companies that came out of that era and changed everything: Microsoft, Apple, Intel, etc. Cell phones. The internet. The list is long.

Yes, we have to make our way in this Muddle Through World. It will be challenging, but I can almost guarantee you that when we do get through there will be other challenges. If it was easy everybody could do it and there would be no money in it. Embrace the challenge!

I asked one of my really close (36 years) friends and business associates last year how his business was doing. "We are doing great!" he said. That was not the answer I was expecting. "Why? How?" I asked.

"Well, most of our competitors have folded. We survived and got the business."

Ultimately, that is how we get out of this. A hundred million families and millions of businesses figuring it out, learning how to adapt to the New Normal. Sadly, some of them won't make it. But most of us will!

As I said, I am a serial entrepreneur. I have a friend who designs and oversees large teams of programmers of really robust analytic software, very cutting-edge stuff. She is a winner, and I am backing her (I know nothing about software but the rule is, invest in people!). We'll see how it goes, but my bet is that in a few years there will be a lot of people getting jobs because we take on some risk now.

We are adapting our own business here. We will soon have new websites. I will be doing (at first) an audio podcast called the Mauldin Minute and then (hopefully) by the end of the year morphing into video. That's the wave of the future and I need to keep up.

I am addicted to information and reading . We are going to try and make some money from my addiction. What would you pay to look over my shoulder and read the 5-10 most important things I find in a week? I will become your personal reader. Will that be a life-style changer? No, but it will provide some income diversification.

When Tiffani made her presentation to her Vistage group about our business, she had a lot of charts and graphs. I was surprised how our sources of income have varied over time. Some previously large (at least on my scale) sources literally dried up within a few years, completely askew from our original optimistic expectations. It was very apparent that we cannot sit and assume things will be the same year to year. So we adapt.

I have been presented with a very different opportunity in a non-finance field that is right in my wheelhouse, as they say. Tiffani and Ryan and I are going to pursue it. Will it thrive? Be a real business in five years? We will see, but I have the ability to take that risk and I am going to do so.

And so will hundreds of thousands of other visionaries and dreamers. That is how we get through this. We work through the ugly and then we get to the 2020s, and I think we will once again be talking about the Roaring 20s! Whole new industries will come into existence. Pay attention to the advancements in robotics. Biotech will be HUGE this decade, but we need to change the rules so we don't lose the intellectual property and the jobs. Electric cars will boom as we replace our fleet all over the world. Nanotech later in the '20s. Green energy and nuclear. Artificial intelligence (finally!). Really cheap (I mean really cheap!) wireless high-speed broadband all over the world will open the door to all kinds of possibilities. I met last night with very credible scientists who have developed a way to filter water very cheaply. A desalinization module that fits in a cargo container. Yes, they need a lot of money to finish, but they will figure it out. And on and on. The opportunities are going to be huge. Trillions will be made.

So, we get through this. We Muddle Through. We figure it out, one business and family at a time. And as a culture, a world, we get to a better place. My bet is that in 2020 no one is going to want to go back to the good old days of 2010. We will be excited about the future and all the cool stuff that is happening.

Recessions and tough times are God's way of telling you that you need to adjust a few things, both on a personal and business level - also nationally and globally. I am an optimist. I believe we will adjust and grow, not just in the US but as an emerging world. There are just so many opportunities.

So, don't let the problems I write about in this letter make you crawl into a cave. Just be realistic and figure out where your opportunities are. And then go make them happen! You are responsible for creating your own future. And I hope it is a good one. I plan on making mine one.

Rosenberg: There Was Never A Recovery

Here is a link to David Rosenberg on Fox Business talking about the possibility of a double dip. Like myself, I don't believe we are going into a double dip, I believe we never actually recovered. When the number of unemployed continues to grow....that is not a recovery. I don't necessarily agree with David on Gold, but so far he has been right on about Deflation and interest rates as well as his economic calls.

Scott Dauenhauer CFP, MSFP, AIF

Federal Reserve: More Money Printing To Prevent Deflation

On July 2, 2010 I wrote the following:

Interest Rates

So where are interest rates heading? Your guess is as good as mine, but here are my thoughts.

I believe interest rates are headed down and may stat there - unless we get an oil shock. If you have been reading my blog you will have noticed that I’ve tilted more toward the Deflation camp and have been warning that interest rates may fall further. In fact, that is what has happened. Could they fall even further? It is possible. Just look at Japan. For this reason, I don’t expect the Federal Reserve to raise interest rates until 2011 (or longer), meaning more pain for investors looking for income. Income investors are paying the price for the bailouts. Having said all that, I cannot rule out an Oil price shock. War and more fallout from oil leaks could put a crimp on supply or expected supply which could lead to high oil prices (right now prices are falling due to unexpected lower demand globally) and those higher oil prices could have inflationary effects on the economy (please note that this is not true inflation).

Longer term I believe there is a high probability the Federal Reserve will resort to another round of Quantative Easing or money printing. While many believe this will lead to inflation or a hyper-inflation (hence the Gold-bugs) I am not yet convinced. If all the printing simply ends up back on bank balance sheets and thus not in the economy it may have no affect (other than to take bad assets off the balance sheets of Too Big Too Fail banks). For money printing to work the money must circulate in the economy (referred to as the Multiplier), as of now it is not. While this does present an opportunity to be in high-grade intermediate bonds, I’m not convinced there are not risks there as well, but you can be assured I will continue my quest for appropriately priced income-risk assets (note, “income-risk assets” is a term I just made up).

Today the Fed announced another round of Quantative Easing, though with the goal of maintaing the balance sheet not expanding it. Essentially the interest and and principal payments coming in from the Mortgage Back Securities was retiring the securities, this money will be reinvested into longer term treasuries instead of allowing to disappear.

Scott Dauenhauer CFP, MSFP, AIF

Trial Balloon of Mortgage Forgiveness Buzzes

As I've stated for almost two years now, the only way to deal with the ongoing housing crisis (and yes, there still is one) and banking crisis is a program to eliminate those mortgages that substantially underwater. While I might be biased as I am one of those people, the Obama administration may in fact be readying a plan to begin forgiving some principal (something that should have been done a long time ago) on some mortgages.

The issue I have with this is that it will cost taxpayers - though my position is also that it will cost taxpayers much more NOT to forgive some principal. I think the banks need to feel the pain of their mistakes in order not to make them again, but I also believe that Wall Street has received so much bailout money while Main Street has been stuck with the pain of this depression.

Had the government implemented this type of program initially it would have bailed out the banks by bailing out Main Street - thereby solving two issues at once. I am still not for a blanket bailout, I believe people should be held responsible for their decisions (including myself), but I also believe that the document mass fraud perpetrated on the American homeowner must be rectified. Housing has the potential to drag the economy into a Great Depression and the administration knows this.

Its too late for housing to solve our issues, but it could be a good step forward. I favor a program that John Hussman has put forward - essentially an equity sharing program where the government shares in any appreciation after forgiveness. The other option is simply let a massive number of homes foreclose and further drag down the balance sheets of the nation's banks, making them more insolvent. Please understand - this is a BANK BAILOUT wrapped in the blanket of a Main Street bailout. Wall Street knows they won't get any more help (even though they know in a crisis they will be bailed out again), this is there plan to remove bad assets from their balance sheets quickly and unload them onto the governments. The fact that they can help out Main Street is just icing - this is a last ditch effort by those who know the real issues that exist.

I want to make it clear that I am not endorsing this program, which doesn't even exist yet. If it happens, I'll review and let you know my opinions. I can tell you this, few Republicans would oppose (after all it was John McCain's idea).

Scott Dauenhauer CFP, MSFP, AIF