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Issue 3

Forest & Trees

report July, 2011 In this issue:
FOREST Short story of money Roman references Charting the Forest TREES What is CPI Who and how Charting the Trees DISCLAIMER SHORT STORY OF MONEY
With few exceptions the Emperors of the third century pursued a policy of wasteful expenditures. Personal extravagance, donatives to the populace at Rome, costly civil and foreign wars, in which the pandering to the greed of the soldiery was a condition of success, had drained the wealth of the provinces. The conception of a national debt was a foreign to the Emperors of the third century as it had been to the statesmen of the republic. Instead to give an air of supercial superiority a resort had been made to a policy of ination. - H.M.D. Parker - A history of the Roman world AD 138-337
Yes, I am a historian. I will admit that I enjoy reading about ancient wars and societies. I also like reading about ancient economies and monetary systems. Almost every time I mention that I studied history the response is, I hated history. Sorry! What follows might not be too boring though. If you live in the western world in the year 2011 history can certainly teach you a few things about what may come next.

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There have not been many occurrences in history where an empire held a reserve currency. One interesting point to note is that the money of Rome, Byzantium, Florence, Britain, and America have all either suffered or are suffering from devaluation through ination. Perhaps we can get a sense of what to expect from looking at other experiences.

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ROMAN REFERENCES
Sometimes the scary part of history is that it repeats or rhymes. This can be especially disturbing to those who do not have any idea of the sketchy parts of the past. I am not sure if the repeating and rhyming has to do with people not understanding history, arrogance that one can experience a different outcome in similar circumstances, or a little of both. Recently, I have been brushing up on my Roman history to get a sense of some of the rhymes with then and now. The best way to tell the story is through quotes mixed in with my comments. Ination in Rome Monetary, scal, military, political, and economic issues are all very much intertwined. And, they are all so intertwined because any state normally seeks to monopolize the supply of money within its own territory. - Professor Joseph Peden - lecture on Ination and the fall of the Roman Empire Lets remember that ination is the expansion of the money supply and rising prices is a side affect of ination. Roman money came in the form of coins that were minted in gold, silver and bronze. In Rome, during the boom years, the money supply was expanded primarily through mining which was very laborious process with primitive tools and better yet through conquests. After conquering new lands the plunder went to the Roman coffers. So, every time the Romans conquered a new land the money supply increased. The following are excerpts from H.J. Haskells The New Deal in Old Rome in regard to money and ination. See if any of it sounds familiar. Quoting Suetonius, When he (Roman Emperor Augustus) brought the royal treasures of Egypt to Rome, money become so abundant that the rate of interest fell and the value of real estate rose greatly. Dio also weighed in regarding the period of Augustus telling that interest rates had fallen from 12% to 4% and that the price of goods rose. The following quote from Haskells book runs so close to the current issues facing America I could hardly believe it when I read it for the rst time. The feverish business and speculation activity that had sprung up in Rome with the great era of expansion continued to enrich few at the expense of many. The situation would have been different if the new capital could have been used to develop industries whole production would have been distributed in wages and salaries to the benet of the whole community. But, such a use requires a degree of industrialization that was wholly lacking in ancient Italy. The wealth that owed in was concentrated in a comparatively few hands. It was spent on luxuries from abroad, maintaining large slave establishments, on big country estates, and sometimes investments in the provinces. It created few new jobs. There was little chance of the poor man to get ahead. Further... The condition of the unemployed or unemployable was a pressing problem. They had to be taken care of if jobs could not be found on public works or in colonial settlements. Even during civil wars it had proved necessary to continue the free grain-distribution. Indeed, the relief rolls had climbed after Caesars death...Augustus once more introduced a means test and reduced the numbers...

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I thought this one was good considering the US now has more than 14% of the population in Food Stamp participation while the banks have record prots. In addition, there have been rumblings of means tests for social security. In Will Durants The story of civilization - Caeser to Christ the author comments on the economic and political decline: Political anarchy accelerated economic disintegration, and economic decline promoted political decay; each was the cause and effect of the other. The sad reality is the U.S. is in an economic decline. We are swimming in debt with few options to work our way out of the hole the government has dug for us. To make matters worse, over the decades, the US has become a service economy with a GDP that is 70% consumer driven. As I write these words our fearful leaders are struggling to compromise on how to raise the debt ceiling. A debt laden economy that is printing money hand over st and putting those dollars into a few hands will for sure see political anarchy in its future. Keep in mind the following chart that shows the percent of national income represented by after-tax corporate prot. The most important thing is to see when the last time this happened.

Lastly, contemplate the following quote: Once Italy had had collected the bullion of conquered lands (read as increased the money supply aka ination) and grown rich on the robbery; now money was migrating to the industrialized Hellenistic provinces, and Italy grew poorer while the rising wealth of Asia Minor forced the replacement of Rome with an Eastern capital.

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CHARTING THE FOREST
The rst image, at right, is from the great website MappingHistory.com. What we see is that as soldiers wages went up the content of silver in the coins went down. The cost of the army was a huge part (over 50%) of Romes expenditures. Since the Romans did not print money the way to debase the currency was to lower the silver content.

Issue 3

To the right is a chart of the US dollar versus what amounts to a little over 50% (53% to be exact) of where our tax dollars go which is defense, social security and medicare. Granted it took the Romans a much longer time to devalue their currency. Thanks to technology and printing presses we have sped the process up signicantly.

Another thing to keep in mind is that for the Romans ination (dened as expansion of money supply) happened only if they mined more or conquered and plundered. So, if their expenses were getting away from them they had no choice but to lower the silver content of their coins. Just like we have no choice but to print money or accept less. The model at right says it all surplus economy prosperity, debt economy less civic prosperity. Ask the 3rd, 4th, and 5th century Romans what life was like. I imagine not to different than the Greeks today and likely the US of the very close future at the rate we are going.

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WHAT IS CPI
We all read or hear about the CPI but what is it? CPI (Consumer Price Index) measures changes in the price level of consumer goods and services that are purchased by households. There are two primary reports of CPI. The rst is Headline CPI which reports all items and then there is Core CPI which removes food and energy. Even though Headline CPI keeps in food and energy the massaging of the numbers has changed it signicantly over the years. The Bureau of Labor Statistics (BLS) began tracking US CPI back in 1919. The original intent of CPI was to measure the price changes in a xed basket of goods. Over the years the data was been changed to meet government needs (read as scam the populace). Below is a short list of changes that have been made to CPI over the years: Post depression the index was changed in 1940 to reect buying habit shifts. During WWII and the resulting scarcity of commodities the index was changed, temporarily, to reect shortages. Post WWII the index was changed again to reect buying habits, then revised again in 1953 and 1964. In 1978 the index was changed again to reect buying habits measured from 1972-1974. In 1983 housing prices were replaced owners equivalent of rent. In more recent years the real damage has been done to CPI to make it almost useless. According to John Williams of ShadowStats.com: Some years back, then Fed Chairman Alan Greenspan began making public noises about how the CPI overstated ination. Where the xed-basket of goods approach would measure the cost of steak, year after year, Mr. Greenspan argued that if steak went up in price, people would buy more hamburger meat, mitigating the increase in their cost of living. The fact that switching the CPI concept to a substitution-based basket of market goods from a xed-basket violated the original intent, purpose and concept of the CPI, never seemed to be a concern to those in Washington. Articially reducing reported CPI ination would have a variety of benets, beginning with reduction of the budget decit due to the cutting of cost-of-living adjustments for Social Security payments. The best way to illustrate the uselessness of the governments statistics is to look at your purchasing power and the producer price inputs. The chart to the right shows dollar purchasing power (blue) and the the other lines are producer prices of nished consumer goods, commodities and capital equipment since 1970. Bottom line - costs are rising and purchasing power is falling!

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WHO AND HOW

Most, if not all, of us were invited to parties as teenagers (pre-driving teens). For me, when asked, I wanted to know who was coming and how was I going to get there. These questions are also important in todays investing environment. It is important to know who is buying and how are they buying. Some very enlightening research came out in the last few weeks answering those questions. My fear at this point is the same as most teenage parties that get out of hand with to many people getting drunk and the cops showing up. For months now I have been tracking money ows into mutual funds, market volume and watching the insider (read corporate executive) transaction info at the Wall Street Journal Market Data site. None of these items have given any credence to the market rise we have seen. One known fact is that super-low interest rates certainly will promote speculation just as it has over the centuries. But, I still could not come up with why my gut kept saying something was not right. Then came TrimTabs research and ZeroHedge.coms insight. Have a read of a few bites of an article on MarketWatch.com titled The real story behind the market boom. So who was driving up the market? What was creating this boom? Turns out it was the companies themselves. TrimTabs says companies spent a thumping $124 billion in the rst three months of the year trying to boost their share prices by buying up stock. That works out at about $2 billion for every day the market opened. Meanwhile, according to Trim Tabs, guess who avoided buying stock during the rst quarter? Company executives. The insiders. We know this by looking at the following headline from ZeroHedge.com: Insider Selling Update: 2 Buyers, 50 Sellers; Ratio Of Corporate Stock Buybacks To Insider Purchases: 16,800 To 1. This can be supported by the following from the Wall Street Journals Market Data center information. This is from the week ending 7/22/2011. The below is executive activity in the stocks of their own company. This is their money not company money referenced above by TrimTabs.

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It gets worse folks. According to the Charles Bidderman at TrimTabs: Weve never seen such a sharp contrast between what insiders are doing with their own money and what theyre doing with the money of the companies they manage, TrimTabs Chief Executive Charles Biderman wrote in a note. Stock buybacks outnumbered executive stock purchases by the highest ratio TrimTabs has seen since it started tracking the numbers back in 2004. While insiders are willing to use corporate cash to try to support the value of their stock-based compensation, they dont seem to think their stocks are attractively priced, Biderman said. And still worse! Here is the truly scary part. Where did the companies nd the money to buy back their stock? In some cases the money came from prots. Thats a good thing. But in other cases they just borrowed the funds. According to the latest data from the Federal Reserve, corporate debt surged again last quarter to the highest levels on record.Debts for non-nancial corporates hit $7.3 trillion by March 31, reports the Fed. Thats up more than $100 billion since the start of the year. The total at the end of 2007, at the peak of the so-called credit bubble, was just $6.7 trillion. Now we know who is at the party and how they are getting there. Problem is how long do you want to stay at this party?

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CHARTING THE TREES
Domestic equity fund ows versus the S&P 500

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Below is a comparison of todays Core CPI versus John Williams at Shadow Stats Alternate CPI. His alternate CPI methodology uses formulas for CPI prior to the government monkey business with the current CPI formula.

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DISCLAIMERS
Investing involves substantial risk. Becker Advisory Services (BAS) makes no guarantee or other promise as to any results that may be obtained from their views. At the time of writing Henry Becker and/or Advisory Services clients holds the following securities that are related to the content of this publication physical silver, physical gold, and ticker symbols CEF, GTU, and GDX. No reader should make any investment decision without rst consulting his or her own personal nancial advisor and conducting his or her own research and due diligence, including carefully reviewing the prospectus and other public lings of the issuer. To the maximum extent permitted by law, BAS disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations in the update prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses. The information provided in the report is obtained from sources which BAS believes to be reliable. However, BAS has not independently veried or otherwise investigated all such information. BAS does not guarantees the accuracy or completeness of any such information. The commentary, analysis, opinions, advice and recommendations represent the personal and subjective views of the BAS, and are subject to change at any time without notice. The report is not a solicitation or offer to buy or sell any securities.

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