The Mess We Are In

I have been thinking about doing this for a while to help some people understand what is going on in our economy and with the government. I also will do this as best I can to keep the politics out of it and just name the facts. This is a very complex issue and I will make a series of posts breaking down each part and in the end tying it all up together and hopefully give everyone an understanding on how bad things are screwed up and how bad things are likely to get and when You understand the different pieces of the puzzle and put them together, You will see it for Yourself.

I want to break this down into a few subjects and give a basic understanding on how they work. I myself do not fully understand the mechanics of all of them but I have a basic idea how some work while I have a good understanding on others. I will try to make them as short as possible. They are.....

Stock market

Bond Market

Commodities

Currency

Interest rates

Government


I will in the end tie them together to give the "Big Picture" on how bad the government has messed us up and what to expect. I don't care what party You are in, They all hold fault in this. Some for putting this in motion, some for not stopping it.CF

This one is pretty easy to understand. Most companies start out private and are funded by their own funding or start from the ground up and work off of their own profits but when they want more money to grow they may want to go to investment money. One good source of that investment money is the NY stock exchange. The company has some criteria to meet and once accepted, and determined how many shares can be sold, there is an opening auction to decide the value of the companies stock. From then on, it is traded every market day. The stocks value is basically a reflection of the confidence of the investors of the company. The confidence is in the form of money. The company wants to draw in more buyers to drive up the price of the stocks to give previous investors still holding the stock a return. When the stock gets so high that people cant really afford to buy many shares, the companies will do a split of stocks to cut the value in half but the investors will now have twice as many shares but makes the stocks more affordable. when confidence goes away from a stock, the stock holders sell the stocks and the name of the game is to sell the stock before the large amount of selling drives down the value. Meaning You bought low and sold High.CF

Ed, don't worry about Boscoe hating you, he is a sissy.

When will you provide us with the first lesson?

There are two emotions that drive any free traded market. Fear and Greed. There is one always controlling the market. Greed is buying up the market until the buying outruns the market, then the selling that ensues when the buying runs out and selling takes over. The fear is knowing the market is overbought and being scared that the selling will happen too fast before You can get out with a profit. So from time to time, the market is overbought and oversold but there is a reason this happens. It is called price discovery and all the market does with this up and down see saw action is "discover" the true value of the market in general, right down to the individual stock, commodity etc.. When the economy is in good shape and companies are showing good profits, investors pour money into stocks because they are confident that there will at some point be a good profit return on their investment. This buying will continue until the market actually outruns the economy. This causes a pull back. This is a healthy thing as it keeps companies in check and helps the greed at check. As long as the economy grows, the stock markets and other markets tend to rise with the general economy. So the stock market can be seen as a general barometer of the economy. The market is always going up and down. It can also trend in that up and down motion either up, down, or sideways. uptrends are called Bull markets, Down trends are called Bear Markets and then there is the sideways trend. Money is being made in all these types of market trends. The economy and the General public traders like bull markets because this is growth. There has to be small, healthy pull backs from time to time though because what goes up, must come down but as long as the trend remains up, you make money over the long term because new highs will come eventually. What happens in a "Bust" is usually caused by a huge amount of greed or some bad outside influence which in the case of the recent recession, was caused by both. A recession is just a pullback on a larger scale and is a healthy thing when left alone because it tends to correct (run out of business) the root cause of the recession to start with. Outside influence by the government or some other source of influence can prolong the inevitable. If left alone, a recession can be short lived as the competition will absorb the demand of the poor acting business and get things back on a firmer footing bringing confidence back to the market and in most situations, bring a roaring recovery to the economy and in most instances, New Highs with an improved, better running economy. Recessions are supposed to be good things. When recessions are prolonged by outside influence they are called "depressions". I'll get into that one more later and some things will not have to be explained at this length.CF

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Originally Posted by Don G

Ed, don't worry about Boscoe hating you, he is a sissy.

When will you provide us with the first lesson?

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Got some up now Don. Will continue later.CF

The Bond Market is known primarily for Treasury Bills(Bonds). They can range from short term Bonds to long term. I know of 5 year bonds but I'm sure they come shorter and they go out to 30 year Bonds. Bonds are backed by the Government through the federal reserve and because they are backed by the government, they are thought of as a safe haven for investment money. safe haven as in the government will remain solvent to back the Bills. The investment return on the bonds is called yield and the yield is based from a percentage of the value of the bonds but the yields return work backward from a stock or commodity. A stock or commodities value goes up with more buying, the yield on bonds goes down as more bonds are bought. The government is basically saying that when bond prices are low, "We need Your investment money and will pay a higher yield to get Your money". When the Bond prices are high because of a high amount of bond purchases, the government says "We have plenty of people wanting to buy bonds so we will not pay as high of a yield". Even the higher yields will not match strong returns of the stock market so the stock market is the market of choice for most investors to make money. After all, making money is what they are doing for a living. They are going to go to the place that makes the most for them. Remember how the bond market works because it is part of what is going on with this mess we are in.CF

You hear it on TV a lot. Stocks and Bonds. Two different markets that are used together by investors to keep an investment flow coming in all the time. This is how it works. Being the stock market is the market of higher returns, it is the market of choice so as long as the stocks are not in trouble that is where most of the investment money stays. Because of that fact, the Bond prices fall and yields are high trying to buy some investment money. after all, the government uses the bonds to finance their spending along with tax revenue. Bonds are also a way the government uses to fund spending during a recession when tax revenue is lower because more people are poor and are not paying as much in taxes. A bank goes busted and scares investors out of the stock market, they in return go to the bond market and buy treasury bills (notes,bonds) as a safe haven. The yield goes down as the Bond prices rise but investors won't lose money. They just won't make as much. once the yields have fallen to near nothing, hopefully the mess has been cleared and fear removed and replaced by confidence and the money leaves Bonds and moves back to stocks. This is the simple explanation on how it works. There are other assets that the money could flow to like commodities. To keep it from being too complex, just think of money as water that is flowing to the place that makes more of it. It is not controlled by anything other than economic conditions of the general economy. Just barometers of the economy.CF

These are the things that we consume to live. There are three major classes of commodities. Energy, Metals, and Grains. Each is broken down into its own market. crude oil is the most traded of all commodities and is the King of energies along with RBOB(gasoline) and heating oil (diesel fuel). You also have natural gas and propane and other type fuels. crude affects most all of these individual markets as a whole but they also trade on their own Supply and Demand situations. The King of Metals is Gold and the King of grain is Corn. These all have there subcategories. Metals have copper, silver, platinum, etc.. the grains have Corn, Soybeans, different classes of wheat, oats, barley, canola and so on. Corn and beans have their own complexes with beans having the Soybean meal and Soybean oil markets. The two submarkets can drive the price of beans themselves because they have their own supply demand situations. If there is a glut of meal or oil, they go down and will pull down the price of Soybeans because that is lower demand on a bean product. Corn is the exact same way with Ethanol and dried distillers grains or DDGs. These commodities can cross classes to affect the other as well. If heavy selling is going on in crude oil, it can spill over into the grains and metals and cause them to sell off as well. Maybe not as much as crude, but it can cause a general sell off in all commodities. The value of the dollar also has a lot of impact on commodity prices. I was looking at a corn chart the other day and noticed the last major high price in the corn market came on the same day as the last major low price of the dollar. More on this later as these markets are related like stocks and Bonds are.CF

Currency is traded by comparing it to other currencies performance. Our dollar is priced daily against currencies like the Euro, the British Pound, the Japanese yen and so on. As long as these markets are stagnant, the dollar will trade its own fundamentals like what is going on here at home with interest rates here and the commodity markets. After all, Commodities show the buying power of the dollar and can fluctuate just as much as the power the dollar has on commodities. if demand rises on commodities and commodities in general go up together, it can drive the value of the dollar down. That's how it works. That is how the purchasing power of the dollar is defined by commodities. not only is the commodities going higher but the dollar is going lower. This is how it works when there is no other influences on the dollar. If the Euro is tanking like it has been because of the European economy, it automatically makes the dollar go up because people who are trading Euro's leave the Euro and buy dollars as a safe haven because they see the dollar as more secure right now. REMEMBER THIS too as this is part of our problems to come. Trying to pinpoint what causes the dollar to go up on any particular day can be hard because of all the different influences it has. Another thing that can drive the dollar down is printing more of it! The dollar is like any other commodity, when supply out grows demand, the value of it decreases. It is like air. Not very important until Your not getting any of it. printing money takes value away from it. More later.CF

I explained some on how Currencies and Commodities are related and to go into a little more depth, Commodities are used as a hedge by investors against a lower valued dollar. You hear folks hollering to buy gold on the radio all the time to hedge against inflation. What they are saying is that when currency values go into the toilet because countries are printing money like crazy, the investors trading that money will buy commodities with Gold being number one against the dollar. So as the dollar crashes, Gold soars and protects Your money until at some point, the value of the dollar goes back up. What would make the dollar go back up after dumping a new supply of dollars on the dollar market? INTEREST RATES going up. Interest rates going up will make it harder for anyone to get money easily. Meaning Loans are more expensive and that creates a shortage of dollars to buy things! The value of the dollar goes up which in turn makes its purchasing power go down which in turn drives down commodity prices. So the more money gets printed with low interest rates, the higher gasoline prices go with no change to its supply demand situation. If interest rates rise, it makes dollars harder to get, and price of gasoline goes down with no change to its supply demand situation. So one affects the other and can be very complex. What is going on now with the government is easy to see when You put all of this into perspective.CF