Thanks for flooding my email inbox. I asked for it…
Let's start off with some comments and questions about Ben Bernanke and the Fed….
Q: I see no distinguishable difference in the relationship that government has with the Fed/Banking Systemand some individual getting involved with a ruthless loan shark. ~ James M.
A: The Fed has a no-interest rate policy, while loan sharks charge an arm and a leg. That's one difference. There may be others, but I can't think of any right now.
Q: Shah I beg to differ with you re: your feelings towards Mr. Bernanke. Like you, he understands the situation in Europe. His feeling is that European situation will end in disaster. But unlike you, he can't say it openly. If he says so, he will precipitate the disaster. But he wants to be as ready as possible. His mandate is that when Europe goes kaput, American banking system may be knocked down for a short count but not knocked out. So he is giving the American Banking system time to develop as big a defensive position as they can. ~ Kishin W.
A: My apologies, I beg to differ with you. We don't disagree, though. You're right. Ben can't say what I can say, because if he told the truth there would be another crisis. And I agree that he did what he had to do to save America's banks – otherwise there'd be no capital to fuel our capitalist system.
But he can change the banking system to make it safer and more open, and he hasn't. That's a different kind of dishonesty. He works for bankers, and that's not his fault. That's how the Federal Reserve System works and why it was created the way it is.
Q: Would you say that China and the yuan is nowadays a wise play? ~ Tony C.
A: There's no doubt in my mind that going long (buying) China is a wise play, and that the yuan will eventually become a reserve currency. But, like all trades and investments, it's about timing.
Long term, I look at China as being where the U.S. was in the 1950s. It will get to where we were in the 1990s in another five to seven years, and where we are now in 10 to 15 years. In other words, China is moving forward at light speed, and there's very little to stop its advance to the top of the world order. And, yes, I mean that in every sense of the phrase "world order." Economically and militarily, the Chinese will leave the U.S. in its wake if U.S. politicians don't wake up and put America's interests ahead of their pithy, personal agendas.
However, since Chinese policy makers have just articulated a desire for quality growth over quantity, we may see some monetary tightening. That may be a negative in the short run. Which brings me to this next question.
Q: How does one short China? ~ C.
A: The easiest way is to buy puts on any of the Chinese-based ETFs, or short them. That's what I do and what I recommend to my Capital Wave Forecast subscribers. We just bought puts on the FXI on Monday. It's already working out quite nicely!
Q: Was Dodd Frank a feint, or a genuine effort to pass the only bill that Congress could, in light of Republican and Wall Street opposition? ~ Jim
A: It was both. I'd say you've got it exactly right and said it better than I could have.
Q: Shah: Isn't there some way for you to galvanize support on this website for bringing back Glass-Steagall? Some way to put some meaningful legislation on the national agenda in this election year? It would be a wonderful public service if you could pull it off. Please! ~Terrence T.
A: We don't know until we try, right? It seems impossible, but where there's a will there's a way. So, at your urging and with the support of a lot of you smart but fed-up folks who agree we should try, I will do my best to push for the reinstatement of Glass-Steagall. I'll need your help and comments on upcoming articles on this effort. Thanks in advance.
Q [Regarding Here's What's Wrong with America]: Wouldn't an obvious solution be to fix that legislation so financial instruments that walk, talk, and smell like gambling or insurance are regulated like gambling and insurance? Just askin'… ~ Jim F.
A: Yes, Jim, that would be a good start. The only problem is, how do we separate speculation from gambling?
Q: Does Democracy always naturally lead to socialism and always end in dependency on the state? ~ Paul J.
A: No, it more often leads to an oligopoly. And that's where we are headed, and very, very quickly. Actually, I have to be honest with you. That's what we have now.
Q: Just as a curiosity, do you think Congress will ever get it right, short of facing a second revolution? ~ Steve
A: Steve, you pose the 65-trillion-dollar question. I have hope, but it's bleeding out of me all too quickly. But, before my blood is wasted on infertile ground, I would gladly carry the banner of a new revolution – peacefully, of course, but with the sharpest of pens and the strongest voices we can muster? Imagine what 10,000,000 people outside the Capitol would be able to accomplish.
Q: I am not a defeatist, but what actually can be done to stop the legislative, congressional and Wall Street boondoggling that's been going on since the birth of the nation? It's so entrenched, crooked, and covered up, not even Elliott Ness could clean it up. ~ Jim H.
A: Jim, where's the love? We can do it. We have to do it. It's worth fighting for and never giving up.
Q: While you're at it, Shah, how about generating some support for TERM LIMITS for members of Congress…? Those politicians who refuse to swap votes for giveaways (are there truly any?) are doomed to lose to their opponent(s) who will be only too happy to give someone else's money away in order to get elected. ~ Gary B.
A: Term limits will only happen after the revolution. We're going to have to get the old Caesars out to make a new Senate and Republic…
Q: What, from your perspective, should be on the burners of those running for elected federal positions? ~ Tom B.
A: I'd like to see compromise on the front burners of all politicians. I'm sick of the name-calling in the name of this or that idealistic and polarizing position.
Politicians are dividing good people in this country. And they're doing it to enrage us, and divide us into their camps, so we vote for their extremism as if it was ours. It's so divisive. And all for power, which is all about access to money. It makes me mistrust every politician who plays that game, and most of them do. However, there is one guy I don't ever hear playing that game. Think about it. Have you ever heard Ron Paul engage in divisive polarizing rhetoric? He's the only bright spot I see on our horizon.
Q: Mitt [Romney] made money by working hard – he earned it.~ Judy A
A: Well, we don't know how hard he really worked, but I agree he earned what he has. That said, we all wish we had his head start. As one of my readers commented some time back on something I wrote about Mitt, "He started out on third base." From there, it's pretty easy to score.
Q: You voted for Barack Obama and you're a capitalist?What am I missing, Shah? ~ Katherine M.
A: I didn't vote for Obama, although I did support his candidacy. But he blew it.
His first order of business as president should have been to fix the financial system, so we never have another crisis like we had, which was absolutely preventable. It was the Republicans who took us to the edge of the cliff, and I used to consider myself a staunch Republican (no-more, no-way). Instead, he chooses to fix healthcare. He struck out on both.
Again, Dodd-Frank is a joke. If he had fixed the financial system, broken up all the big banks, reinstated Glass-Steagall and most of the prudent regulations we once had, and streamlined those, and changed the penalties for rules and law-breaking, we'd be flying high in recovery-mode, and you'd probably love him.
I don't care about Democrats or Republicans. Those are ideological names. There's too much name-calling in America. As a capitalist, I want easy to understand regulations, tough penalties for breaking them, a level playing field and access to capital to do what I try and do… work and make money.
A: Have you heard of Instant Run-off Voting (IRV)?When there are more than two candidates, voters rank their choices 1st, 2nd, 3rd, by preference. If at first count there is a majority winner 50%+, he is the winner.If no majority winner, the lowest candidate's ballots are recounted for the voter's 2nd choices and redistributed to the remaining candidates until a majority winner emerges, voilà. ~ Bill G.
A: Bill, I didn't know about it. Thanks for enlightening me on this. It sounds like a simple, elegant solution to a lot of rubbish (including the Electoral College) that mars what should be a simple vote-for-your-favorites system.
Q: Please take note of President Obama's appointment of a Monsanto top official to be an advisor to the FDA. The GMO revolution has just begun. ~ Robert J.
A: I didn't know about that. But I guess the FDA needs some genetic re-engineering. If that's true, I'm not laughing.
Q [Regarding Liquidity Liquor and the Battle Ahead]: So how does the Bain Capital model differ from the Obama model as concerns GM and Chrysler? ~ Thomas S.
A: Essentially there is no difference; except Obama used public capital, and Bain uses private capital to "fix" companies that they hope will return to profitability. So far, so good, whether we like it or not.
Q [Regarding The Real "Third Rail" in American Politics]: I am a southern-born woman who transplanted myself to the great Northwest many years ago. I have stated very similar sentiments in countless "discussions" with ultra-conservative friends and family, as well as ultra-liberal friends. I am estranged from most of them now. Fortunately, I have a few close friends, and folks "out there" like you, who are courageous enough to step out of the lemming mentality. You bolster my courage and inspire the investor within… Thank you, sir. My hat is off to you, again and again! ~ Wynne M.
A: No, Wynne, thank you. It's people like you that make America great. It's the ultra-this or ultra-that crowd that can't stand compromise because, well, they're always right, don't you know? Otherwise they wouldn't have such strong opinions.
My Scottish mother, who was an incredible woman, used to say to me, when I did something I thought was right, but could just have been my own interpretation of what was right: "I wish I had the gift God gee [Scottish version for "gave"] us, to see ourselves as others see us." I live by that.
Q: Could we receive some guidance and directions on what to prepare for in our survival kit for Greece default? ~ Lorenzo H.
A: Yes. I'll do that this Sunday… if it's not too late.
Q: Put and call options assume that when things go the way of the way of the option player, the side that has to pay will always pay. But, if things melt down as you think they may, then, what's to keep those folks from not paying? Who guarantees our options bets? ~ John M.
A: The Options Clearing Corporation (OCC) stands in the middle of options trades. Money is transferred through the OCC, which keeps margin and reserves on hand to make sure all trades clear on a timely basis.
If we incur another "shock" like we experienced in 2008, the OCC would be 100% backed by the government. That's not the law, but the clearing operations of all exchanges are all "too big to fail" and would have to be backstopped. Otherwise there would be no faith in our financial systems, and all trading and commerce would cease.
Q [Regarding Our Next "Lehman Moment" Is Coming Fast]: It is not a question of who can exactly predict, but if we are not aware of the forces of economic [change], how can we plan intelligently? ~ Wayne H.
A: But we are aware of those forces.
Prediction is only difficult in terms of its timing, which is a technicality. Fundamentally, force is what matters.
For example, most of us could see what was happening to create the housing market bubble. And most people who got clobbered tried to time it so they got out at the top. That's a tough play. The forces of excess were quite evident. I called it right, but I wasn't right on my timing; the bubble had started deflating in 2007. But, when I saw that the forces of ineluctability had exhausted the forces of excess, I called for a total collapse in the spring of 2008. Granted, markets went higher, but force being what it is, the fundamentals prevailed, and the collapse happened.
To intelligently plan, we have to keep an eye on both the fundamentals and the technicals. That means, if you know things are getting bad, and you're riding the momentum wave that you know will roll over one day, don't be greedy. Don't try and get out at the top or get in at the bottom. There's plenty of money to be made in the middle of any force that's building. That's how I try and approach trading and investing.
Let's finish up with some questions and comments that defy categorization:
Q: It amazes me, we have all this wealth of knowledge in quotes and history books yet here we are today, on the cusp of another cycle for a world depression. Why are we unable to avoid these cycles? ~ J.M.
A: That's easy to answer, and I'll use a famous quote from George Santayana to do so, "Those who cannot remember the past are doomed (or condemned) to repeat it." He also said, "Only the dead have seen the end of war."
Q: Sometimes you use abbreviations, some of which I can figure out, some of which I can't… ECB was easy. EFSF is not. I can create meanings ("Everyone Flee the Ship Fast" occurs to me), but I would like to know how to undo the Gordian knot of acronyms. Is there a source into which I can plug that provides such a listing? ~ Kossia O.
A: The EFSF is the European Financial Stability Facility. Google has the delicate fingers necessary to untie almost any Gordian knot of acronyms.
Q: Love your insight. Brilliant! Just one query… Where did you get the Greek public debt figure of EUR 1 trillion? On Bloomberg (function: DEBT) it states Greece's sovereign debt to be EUR 274 (OR 279?) billion. That's a far cry from 1 trillion. Am I missing something here? ~ Arif A.
A: The Greek headline debt figures – such as the Bloomberg number – reflect the national debt as measured by outstanding sovereign bills, notes, and bonds. But that's not the whole story.
To understand, consider this: The U.S. national debt is $15.5 trillion and counting (see http://www.usdebtclock.org/), but that's just our national debt. We could retire it, theoretically, if we could call in all outstanding treasury bills, notes, and bonds. Our states, cities, counties, and municipalities have debt too. And even if you add up all those debts, you don't get the whole debt picture. We have underfunded pension (public) debts and social security and Medicare debt, as well as other "off balance sheet" debts. Greece is no different.
Q [Regarding Stone Crabs and the State of the Union]: I am 82 and have harvested stone crabclaws since I was 12… I have two stone crabclaw crackers, which, if worked properly, will crack but not smash the claw. You should look for one to better enjoy this delicacy. ~ Don S.
A: Thanks for the suggestion, Don. I'll look for those claw crackers. Using a hammer to crack those hard claws is pretty messy. I bet you're a very young and strong 82. Are you still crabbing?
Q [Regarding Bankers Committed Fraud to Get Bigger Bonuses]: Mr. Gilani left out a lot of context in his attempt to paint this as Cantor protecting his Wall Street buddies. Why not mention the reason Cantor took that provision out of the bill? The language was so poor, that it could infringe upon the 1st Amendment rights of a variety of groups who get together regularly to discuss politics – everyone from local rotaries to media conglomerates. ~ Rick
A: Rick, you don't really think that Cantor was thinking about police going into Moose Halls and Chamber of Commerce meetings to infringe on their 1st Amendment rights when he sliced certain language from that Bill, do you? If you really believe that, you and I need to have a long chat over a pot of coffee or pint of whisky.
Q: Have you met Matt Taibbi from Rolling Stone? The two of you have made the last year one of the most enlightening of my life. Unfortunately, you both showed me how pathetic and self-righteous the supposed leaders of our country are and always have been. ~ Anon.
A: I would love to meet Matt. He's a much better writer than me, and I love reading anything he writes. Thanks for putting me in the same category as him.
Q: Shah, you have great sense of humor and talent of a writer – nobody can write about the stock market better than you do. Please tell this to your boss (if you have one) – may be he/she will give you a raise? ~ Alex
A: Thank you Alex. I sent "him" (my editor boss) your comment. He replied that he'll pay me when I'm worth it. Ouch!
Related New and Articles:
- Money Morning:
Liquidity Liquor and the Battle Ahead
- Money Morning:
Greek Bailout, the CDS Market, and the End of the World
- Money Morning:
Don't Be A Wall Street Patsy
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.