Inflation can be deadly to your investments. It’s a silent killer, too — one that reduces your “real” asset value even when the “nominal” worth looks higher.

As my colleague Mike Larson said just a few weeks ago, the Federal Reserve and other central banks are printing money at a faster and faster rate. A weak global economy is letting them get away with it — for now. But eventually they will run out of ink.

The good news is that you and your investments aren’t helpless against the money-printing presses. And today, I’ll tell you about some new Exchange-Traded Funds that offer you a terrific chance to hedge yourself against monetary manipulation.

How to Measure Inflation?

Inflation is particularly damaging to bond investors. If you buy a 30-year bond with a 3 percent annual yield, but inflation also averages 3 percent, all you’ve done for 30 years is break even. If inflation runs 4 percent, then you are actually losing value.

Traditionally, investors tried to protect against this threat with tangible assets like gold. That’s still a good idea. In fact, I currently recommend a gold ETF in my International ETF Trader service.

Gold is the traditional inflation hedge.

With the introduction of Treasury Inflation-Protected Securities (commonly called “TIPS”), bond traders found a new way to measure inflation expectations. Unlike other Treasury bonds, TIPS bonds have a built-in inflation-adjustment feature, and you get paid the adjusted or original principal (whichever is greater) at maturity.

Together, the market prices of these two instruments give us some very useful information. Subtract the TIPS yield from the yield of a regular Treasury with the same maturity date. What you get is a measure of the expected inflation rate over that time period. This is called the “TIPS spread,” and I’ll show you in just a moment why this is important to know.

Several convenient indexes track this indicator at various maturity levels. Typically, the indexes are designed to go up when the bond market signals higher inflation expectations.

(Note here that we’re talking about future inflation expectations, which may or may not turn out to be right. It may also be different from the actual change in consumer prices.)

So what can you do with this kind of information? Until recently, not much. Now you have some new options.

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Announcing: Inflation/Deflation ETNs and ETFs!

On Dec. 6, 2011, PowerShares launched a pair of Exchange-Traded Notes offering direct exposure to U.S. inflation and deflation expectations, the PowerShares DB US Inflation ETN (INFL) and the PowerShares DB US Deflation ETN (DEFL).

Both are based on indexes that measure the TIPS spread at three different maturities. Nominally, the five-year securities are weighted at 50%, the 10-year at 40% and the 30-year at 10%. The result is a blend of the market’s short-, medium- and long-term inflation projections.

The bond market anticipates inflation.

If market action signals higher inflation, you should see INFL go up in value while DEFL drops. If deflation is considered more likely, DEFL should outperform. If inflation is flat, then both should go roughly sideways (or drift down a bit due to their operating fees).

While PowerShares is a great outfit, I’m not a big fan of the ETN structure. The counterparty risk bothers me. (Click here to learn why.)

Fortunately, we have ETF alternatives, too.

The ProShares 30 Year TIPS/TSY Spread (RINF) and the ProShares Short 30 Year TIPS/TSY Spread (FINF) are similar in concept to INFL and DEFL.

One key difference, however, is that the ProShares benchmark index is tied strictly to the 30-year TIPS spread. This should result in RINF and FINF being more-sensitive to short-term changes in the inflation forecast.

You can’t go both directions at once!

As the name suggests, FINF (the short ETF) is an “inverse” variation of RINF (the long ETF). It will go down as RINF goes up, and vice versa.

There is no diversification benefit to owning RINF as well as FINF. In fact, owning both would be counterproductive because you’ll be working against yourself. The same is true for INFL and DEFL.

Bottom Line

Here’s a quick summary of how to use these new instruments.

• If you think inflation will go up, consider buying INFL and/or RINF.
• If you think deflation is the bigger problem, look at DEFL and/or FINF.

These aren’t the only ways to protect your investments against inflation or deflation. As I said above, gold funds and other traditional hedges can work, too. These new instruments offer a laser-focus on the TIPS spread without other complicating factors. This gives them many potential uses. Check them out.

Best wishes,

Ron

P.S. For the best ETFs to invest in — with complete details on what and when to buy and, more importantly, when to cash out — join my International ETF Trader service. Click here to get started today!

Even though you know that trading the headlines is a sucker’s game, plenty of people who continually miss that memo wind up driving stocks up or down based on what they think the day’s headlines really mean.

The bad news isn’t just that your positions can get hurt if stocks go down but, moreover, that they can get driven up artificially based on false optimism … which can cause them to crash even harder when the real news comes out, or when the next batch of headlines isn’t as positive (even if only in perception) as the last.

The good news, however, is that you can easily become far more-informed than these trigger-happy buyers and sellers, simply by digging just a little deeper before you decide to join them in panicking and, worse, losing money. Armed with this additional information, you can make much-better decisions about what to do with your investment dollars.

Today let’s take a look at how some “real” numbers can easily be disguised by investors seeing only what they want to see (or, what is most readily available).

I’ll also help you to de-mystify one of the most-important reports that moves the U.S. markets — the Employment Situation Report — so that you’re not caught off-guard the next time this (or any other) headline comes out that only gives you part of a much-bigger story.

Lies, Damn Lies and Statistics:
The Truth Behind What You See

For example, last Friday’s monthly jobs numbers — rather, the “headline numbers” — showed results that were much better-than-expected.

For the month of January, the economy added 243,000 jobs vs. expectations of 135,000. Additionally, the unemployment rate fell to 8.3% in January from 8.5% in December.

Clearly this was a good number for the economy, and it shows our employment situation nationally is improving. The stock market reacted accordingly, with the Dow rising over 150 points in trading on Friday, reaching its highest level since May 2008!

That’s great news, right? Well, that depends how accurate the data driving the markets happens to be. The “real” information is usually a little more difficult to come by, but it’s there if you know where to look.

While the headline number was strong in the unemployment report, a look behind the headline shows some reasons to think this number wasn’t quite as “good” as the market believed it to be.

When trading or investing, it’s always important to look at a move in the markets or a stock to see whether that move is appropriate given the news — this can help you figure out if stocks, or the market, are trading at a premium or a discount, which presents investment opportunities.

The employment data is important because employment leads to consumer spending, which is 70% of our overall economy. As an investor, better employment means higher stock prices.

The employment numbers are an improvement over previous figures, but this doesn’t necessarily mean the data we’ve been given are entirely accurate. Here’s what I mean …

Why You Can’t Always
Take Data at Face Value

One thing professional traders examine in the Employment Situation Report is the average hourly workweek. This number, which shows the average amount of hours worked nationally and then by industry, works as a leading indicator to employment.

The reason is simple: When business begins to pick up, managers work their current employees for longer hours rather than going out and immediately hiring new workers. Only after this new business becomes a sustained trend do managers hire new workers.

So, you would want to see that average hourly workweek number rising — and in this latest release, there was no change from December, which is a potential negative.

Here’s something else to keep in mind …

The employment situation report is a seasonally adjusted number, which means jobs are added and subtracted at different intervals of the year to account for natural fluctuations in the number. One such adjustment comes mostly during the winter months. The reason is because of typical bad winter weather.

In other words, people who are employed sometimes can’t make it to work, and as such can be counted incorrectly as temporarily unemployed. To counteract that, the average number of those people is added back into the report during the winter months.

This winter, however, the weather has been very good, and few workers have been prevented from going to work because of weather-related factors. This means these people are, in effect, being double-counted.

So, if you’re making new investments based on what you perceive to be good data, you might be in for a surprise when the adjusted numbers come out.

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Go Behind the Headlines
For the Real Story

When you hear people in the media and politicians discussing the unemployment rate, the number they quote is called the U-3 rate. This is a very statistically manufactured number, and only counts people who are actively looking for work, but can’t find any. If a person isn’t actively looking for work, yet still unemployed, he or she isn’t counted in this often-quoted unemployment rate.

The better number to look at is the U-6 unemployment rate. It includes, in addition to unemployed people as defined by the U-3 number, people who are underemployed (i.e., not working as much as they want to be), and people “marginally attached to the labor force” — that is, those who need/want jobs, but are so discouraged that they have quit looking.

The U-6 is a much-better indicator of “true” unemployment in this country — and while it has been improving recently, it still stands at a much-higher 15.1%.

The point of all this, other than to explain the employment number a bit, is to show that it’s important to look beyond the media-reported headline numbers, to see the if the internals of the number accurately reflect the headlines and market reaction.

What the Real Numbers Mean

The way I see it, the market’s euphoric reaction to the data on Friday may be overdone, and I believe the market may be at risk of a shorter-term decline. Employment — and, therefore, the economy — isn’t nearly as good as the headlines would lead us to believe.

Yes, things seem to be getting better, but they aren’t better yet!

This won’t be the last time the market over- or under-reacts to an economic release. But when it happens, it can present lower-risk, contrarian investment opportunities for savvy investors.

Every week, several economic reports come out that can affect your investment decisions. And if the thought of combing through all that data can be downright overwhelming, you don’t have to worry anymore — I’m here to help!

In my Million-Dollar Contrarian Portfolio service, I help my subscribers to sort through the noise as well as to choose solid investments that not only hold up well no matter what the broader markets are doing, but make gains even in spite of it.

Have a good day,

Tom

In a couple days, I’ll be heading down to Orlando to attend the 2012 World MoneyShow.

I always enjoy my time at this annual event because it gives me a chance to interact with other investors on a more personal level. I get to hear what they’re thinking about … to discuss the investments they’re using … and to talk more about the challenges and opportunities that they’re facing.

For the third year in a row, I’ll also be sharing some of my big-picture ideas, strategies, and investing ideas in a special workshop. And if you’re planning on coming to the show, I hope you’ll attend!

Of course, either way, I wanted to give you a sneak peek at what I’ll be discussing in Orlando because I think these ideas are absolutely crucial to your financial well being. So without additional fanfare, here they are …

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First, You Have to Recognize Just How Shaky
The Old-Line Retirement Systems Are …

I have written a lot about Social Security, pensions, and other traditional retirement systems here before. But what blows my mind is that — despite a nearly-universal recognition of the problems — very little is being done to actually ADDRESS them.

Let’s just stick with Social Security for a moment.

We know that it is already taking in less money than it pays out. Even the program’s trustees — who have been miscalculating the shortfalls and timetables all along — now think this situation may be permanent without changes being undertaken.

And yet not only did lawmakers pass a package that equated to even LESS money flowing into the system for 2011 and the first two months of 2012 … but they are now working feverishly to extend this legislation through at least the rest of this year!

As I’ve said in the past, I’m as happy as anyone to keep more of my hard-earned money out of Uncle Sam’s hands. However, I’m continually appalled at just how far into the future our supposed leaders are willing to push major fiscal problems like the Social Security mess … and how they will even recklessly exacerbate the problems just to save face or build some short-term goodwill with the American public.

Meanwhile, we continue to see similar mismanagement across the individual states regarding their retirement promises. Massive shortfalls in these pension systems remain commonplace — the legacy of unrealistic promises made to win political favor and planning that was based on only the rosiest scenarios.

Now, am I predicting that retirees will be left out in the cold? That Social Security will implode or state pensions won’t deliver any income in retirement? No.

However, I wouldn’t make any of these systems the sole basis of your retirement plan.

In fact, at this point, I believe only corporate America has done anything to truly tackle this elephant in the room — by shoring up their pension plans, ratcheting back promises, and yes, in some cases reducing or cancelling former promises that were made to workers.

That’s why — no matter what you believe about the fairness of the situation — I continue to say …

It’s Imperative That You Continue
Building Your Own Personal Nest Egg

Look, I hope I’m wrong. I hope all of our systemic problems are magically fixed and everyone gets the money they always planned on.

But retirement planning is all about WORST-CASE scenarios. Hey, it’s a lot better to end up having too much money during your golden years than to come up short.

So the answer is to save aggressively, save often, and make that money work for you without taking massive risks.

I give this same suggestion to everyone I speak with — regardless of their age, income level, or investment background.

Of course the next immediate question is always about HOW to actually do this.

You probably already know my primary answers, but here they are in an easy step-by-step format:

First, you establish a budget that allows you to both enjoy the present while saving for the future. (And while people often tell me how impossible this is in their particular situation, I have rarely seen an instance where they were right.)

Second, your initial savings goes toward a liquid emergency fund.

Third, after that liquid emergency fund is established, you start using tax-advantage retirement accounts — 401(k)s, IRAs, etc. — to save even more money for farther down the line.

And once you get to the third step, you consider using an age-appropriate mix of cash, bond funds, and dividend stocks to build a solid investment portfolio. If you like gold and other alternative assets, you can add some of those, too.

This Is Precisely the Simple Plan That I
Recommend to My Own Family Members …

My 64-year-old father’s income portfolio is a great example. Over the last year and a half we have gradually shifted his money from a pay-nothing money market fund into a solid list of dividend-paying stocks as well as a select bond fund.

While we still have about 40% of his $100,000 in cash … he has earned a 9% overall return on his money so far … which is more than a hundred times the return he would have had otherwise!

As we put even more of his assets into higher-yielding investments, I expect the returns to only increase at a faster rate.

Plus, as I mentioned last week, I’m now preparing to use more advanced strategies like covered call writing to squeeze even better income out of the investments he already owns, too.

And I’m confident that these same approaches would work for you.

No, there aren’t any shortcuts to gaining financial security. It takes work, planning, and self reliance.

Moreover, today’s rock-bottom interest rates and choppy markets are only compounding the challenges we all face.

But with a little know-how and discipline you CAN get the comfortable retirement you deserve. You just have to roll up your sleeves and get started.

Best wishes,

Nilus

P.S. I’m also planning on getting into some of the specific investments that I’m currently recommending during my Orlando workshop. But if you can’t attend, you can always learn more about them by watching this online presentation right now.

While Washington announced last Friday that unemployment dropped to 8.3% …

And while Wall Street rejoiced with another rally …

The true unemployment in the United States actually rose to an estimated 22.5%, nearly the worst since the Great Depression.

Hard to believe?

Well, thanks largely to John Williams of www.shadowstats.com, we can prove it.

Just consider how the government is lying to us about jobs in America:

Lie #1. “Discouraged workers — unemployed workers who give up looking for jobs — are not really unemployed.”

Even a third grader would know that’s laughable. If jobs are so hard to find that people are abandoning the search, that’s a sign things are actually WORSE, right?

Yes, but that’s not how the government counts its headline unemployment number. Every time more people get discouraged, the government’s jobless number improves!

Lie #2. “Unemployed workers seeking full-time jobs who are forced to accept minimum-wage or lower paying part-time jobs are also not unemployed.”

In other words, based on the government’s definition …

If you’re a laid-off policewoman delivering newspapers for two hours a day, or …

If you’re a former sales manager, greeting shoppers at Wal-Mart on weekends …

You’re not counted among the jobless!

But if you think that’s strange, consider this:

These lies are so enormous and egregious, the government has tried to address the outrage by quietly publishing another unemployment rate, dubbed “U-6.”

This number is never headlined in the press. And the party in power never mentions it.

Why not? Because it’s one of the ugliest and worst-kept secrets of our time.

I’m talking about an official government number that does include some of the part-time and discouraged workers, and that reveals an outrageously high U.S. unemployment rate of 15.1%.

Lie #3 began about 18 years ago during the Clinton administration. Back then, officials at the Bureau of Labor Statistics were counting virtually all discouraged workers — those who had given up looking for jobs because there were no jobs available.

But one day, they decided to STOP counting anyone who had given up looking for more than a year.

So here’s the deal:

If you’re out of a job and you gave up looking for work 365 days ago, you’re still counted as a “discouraged worker” and you’re still among the 15.1% that the government admits are unemployed (based on their less known U-6 number I mentioned a moment ago).

But if you gave up looking 366 days ago, based on their cockamamie scheme, you’re not “discouraged” any more. As far as they know, you’re so happy, you could be dancing in the streets!

Now do you see why I say the government is lying about jobs?

And these are not just trivial factoids that no one cares about. It’s among the most important financial, social, and political problems of our era.

I repeat:

According to Williams’ estimates, if you include all discouraged workers — just as the government itself did before 1994 — the true unemployment rate in America is 22.5%!

That’s nearly THREE times worse than what the headlines say. And it’s even higher than the unemployment of the PIIGS countries in Europe, which are now suffering from massive sovereign debt disasters.

Still skeptical about the idea that the job market in America is not improving? Then take a closer look at what’s happening in the biggest sector of all …

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No Recovery From the Housing Depression!

In the housing market, it’s a lot tougher for the government to lie.

Why? Because unlike the job numbers, the housing stats are largely outside of the government’s control; they’re compiled and issued mostly by private research organizations.

But guess what! The government manages to lie about the housing market anyhow.

First, they tell you it’s improving. It’s not.

Second, they promise to fix it over and over again. But they never do.

This is serious: In the U.S. economy, the housing sector and support industries have traditionally been the largest of all.

And in the average U.S. household, the home is still the biggest single asset.

Look. If home builders were selling more new homes or hiring more construction workers …

If most banks were slowing down their pace of home foreclosures …

If average home prices were recovering …

If all this activity were helping to improve consumer confidence … get people to spend more … and get more companies to start hiring …

THEN, the government’s official statements — including the supposedly positive news they released last week on jobs — might have a ring of truth.

But, alas, in the real world of real estate, we see nothing of the kind. Instead, the facts show that, in recent months, the housing market has actually taken a new turn for the worse:

Fact #1. New home sales in the U.S. have plunged to the worst level in history!

See this chart?

Look how home sales went through the roof during the bubble!

Look at how quickly ALL those gains were erased in the first phase of the bust!

And now look how much further they’ve plunged — down to their levels before the housing bubble even began … down to the worst levels of the 1970s and ’80s … and NOW even down BELOW the worst years of the 1960s!

Fewer new homes are being sold in the U.S. now than back in the days when Lyndon Johnson became president and the Beatles launched their first hit LP.

And in proportion to the U.S. population, the picture is even uglier: For each 1,000 people living in the United State today, less than ONE new home was sold last year — quite probably the worst in history.

Fact #2. Foreclosures continue unabated.

There are still an astronomical 6.17 million families in America behind on their mortgage payments or with homes in the process of foreclosure.

That’s a massive pipeline of foreclosed homes being dumped on the market that probably will continue for years to come.

Fact #3. Home prices are falling — not rising.

You probably know most of this story all too well:

• A devastating home price collapse that destroyed the net worth of average Americans …

• A leveling off of most home prices in 2009, and …

• Even some recovery in many regions since then.

But do you know the rest of the story?

Here it is: We’ve recently learned that, by November of last year, single-family house prices in 20 U.S. metropolitan areas fell again, losing 100% of the gains they’d achieved since 2009!

Plus, we have every reason to believe that, in the most recent two months, home prices have fallen even further.

The New York Times sums up the housing market disaster this way:

“Housing has played a dominant role in the country’s economic sluggishness, as homeowners have struggled with foreclosures or mortgage burdens that far exceed the values of their homes.

“Hundreds of thousands of construction workers and other real estate-related employees have been thrown out of work and are still struggling to cobble together incomes.”

An old story? You bet! But that’s precisely the crux of the problem: It’s already been going on for the better part of a decade … and it’s far from over!

The government’s response: More bailouts, more money printing, and zero-percent interest rates till kingdom come.

The end result: Big bonuses for Wall Street elites … sharply higher asset values in some investment sectors … but, for most of America, a catatonic state of joblessness, depressed real estate, and even poverty.

Did Anyone Clearly Warn You About
The Housing Bust Ahead of Time?

Did anyone explicitly spell out the consequences for homeowners?

Did anyone name the companies that would fail?

Did they give you very practical instructions on how to profit from it?

Yes! We did!

In fact, it was almost seven years ago that we first warned of a “Real Estate Boom … and BUST!”

It was just four months later that we spelled out the dramatic impact of that bust, warning that “panic selling will replace panic buying … crashing values will replace surging values … fear will replace euphoria.”

And it was in March 2007 — literally within days of mortgage and banks stocks beginning their sickening 85% swan dive — that we headlined a “MORTGAGE MELTDOWN,” specifically naming subprime lenders, prime lenders, and banks that would go broke as a result.

We all know what happened in the months that followed: Home sales collapsed. The inventory of houses and condos for sale exploded. Home prices nosedived. Trillions in real estate wealth went up in smoke.

Megabanks like Washington Mutual and Wachovia either failed or were forced into shotgun mergers, while megabrokers like Bear Stearns and Lehman Brothers ceased to exist.

Fannie Mae and Freddie Mac suffered hundreds of billions in losses, forcing them into the arms of taxpayers. The stock market suffered its worst declines in decades. And the economy tumbled into a Great Recession.

Today, we wish we could say that signs of a LASTING turn in housing are finally here. But they’re not.

And today, with stocks rising but housing prices still sinking, the key questions for investors are simple:

 How can you protect yourself from government lies and home market disasters?

 How do you invest in this schizophrenic world?

 And how do you find the sectors that are still making investors’ fortunes?

For the answers, stay tuned! Specific recommendations are in the works and will be in your inbox with your regular issues.

Good luck and God bless!

Martin

My son, JR, has filled in for me on a few occasions. He is also co-editor of my World Currency Trader service. Today he has an interesting insight regarding the euro and how to play it. And I think you could find it profitable. — Jack

I wrote this in Money and Markets on January 14 regarding my outlook for the euro:

“Its only saving grace would be a rising tide of risk appetite.”

My idea that the euro would rally was based on its sell-off being a bit overextended and expectations it (and other assets) would play catch up to stocks. So far that has worked according to plan …

The euro has risen 3.8 percent against the dollar since January 14 — a rather large move if you’re playing the forex market. But technical and sentiment reasons are not all that’s moving the euro now.

A focus on money printing and central bank policy has become a life raft for pushing the euro higher. And that is going to continue — not only because the European Central Bank is working overtime to save the euro zone, but because its counterparts are also complicit in this game to keep interest rates down and credit lines open.

Let’s go over the four main players, starting with the …

European Central Bank

For the better part of 2011, while we were blitzed by pie-in-the-sky bailout packages and financing operations for the euro zone, the ECB spoke tough. For it was not the job of the ECB to purchase sovereign debt; it was the job of banks within those sovereign nations.

Now that we’ve wasted a year watching policymakers produce insufficiently funded lending facilities (e.g. ESM, EFSF, LTRO), euro-zone banks are cutting lending and shoring up their own finances.

The ECB has an overly-leveraged balance sheet and is thus far refusing poor collateral in exchange for loans (or so they want us to believe). Not exactly a functional system if there ever were one.

Last month the ECB chose not to cut interest rates. We’ve speculated as to why (a wait-and-see approach). But the ECB is expected to take that step in March, assuming they don’t surprise with a rate cut next week. They have plenty of ground to give in hopes of supporting the banking system and, thus, sovereign debt.

And let’s not forget about currency swaps with the Federal Reserve — the ECB is becoming quite reliant on that arrangement lately to help alleviate their liquidity problems.

Not since 2009 when central banks were responding to the credit crunch were outstanding swaps this high. When it comes down to it, the ECB will eventually become the local backstopper of last resort when nothing else succeeds in alleviating the pressure on banks and sovereign debt. And they sure won’t mind assistance from the Fed.

The Federal Reserve

You may have heard the latest from the Federal Reserve — the FOMC’s extended period of low interest rates has been extended by another year and a half (out to the end of 2014 now).

Ben Bernanke, in testimony to the House Budget Committee on Thursday, said,

“Risks remain that developments in Europe or elsewhere may unfold unfavorably and could worsen economic prospects here at home.”

Hardly newsworthy …

But perhaps he had to say it to prove he’s not out of touch. What he is probably more comfortable with is the pledge to help the U.S. avoid the fallout from a major collapse in the euro-zone financial system.

It’s tough to say when the euro zone will break. It could happen when Greece defaults, which seems fast-approaching. Euro-zone officials are doing everything they can to avoid contagion from a Greece default, but it is unlikely they’ll be able to fully deflect the pressure on other sovereign nations.

This may be the catalyst for the Federal Reserve’s third round of quantitative easing. Many expect the arrival of QE3 is not a matter of if … but when.

At this point, the Fed pledges low interest rates and additional forms of easing to improving the economy. But the Fed knows full well its efforts have not had a direct effect on improving the U.S. economy. They are thus resigning themselves to propping up asset prices, but they aren’t fixing anything except the price of money.

Bank of England

The UK economy is set to enter a technical recession of at least two consecutive quarters of contraction. The Bank of England (BOE) has acknowledged the softness in the UK economy and has telegraphed the advent of additional quantitative easing.

Next week, when the BOE announces its latest policy decision, it is expected they will unleash an additional £50 billion. Pessimistic expectations for the British pound and UK markets have been somewhat muted because the government has imposed austerity measures aimed at shoring up the budget. Those measures consist of increased taxes and spending cuts.

Roughly 75 percent of the tax hikes have been implemented and are loosely blamed for the current and coming economic soft patch. But very few of the austerity plan’s spending cuts have been made, which suggests the expected recession could last longer if the cuts are implemented.

To sum it up: The government’s commitment to austerity suggests the BOE will remain the sole life raft helping to buoy investor sentiment in the UK.

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The People’s Bank of China

The People’s Bank of China (PBC) is wrapped up with its own economic management efforts. When growth is on the fritz, China eases up on interest rates and reserve requirements; when inflation is on the upswing, China clamps down on easy credit in hopes of stemming overinvestment.

Unfortunately, it is too late to stop malinvestments. And the PBC must now resort to volatile methods of managing the peaks and troughs of inflation and growth. This means encouraging lending and investment through government conduits. Or it means slamming on the brakes to avoid extreme price pressures on its people.

It also means doing its share to keep the current global system operational because they can’t yet survive without external demand for their exports. And that might mean propping up Europe.

China recognizes the contagion potential in the euro zone; and they’re scared of it. At times they’ve suggested they’d provide funds to help backstop European sovereign debt. This week was another one of those times.

Though it might only be lip-service because the PBC may be a little more strapped than one might imagine, as the following chart suggests.

We’re at a point when central banks continue to push investors towards riskier opportunities by making fixed income unappealing with abnormally low interest rates. That explains why markets rise with new and substantial initiatives from central banks. But this dynamic could come to an end, even if quantitative easing continues.

Perhaps this next chart will help. It shows how the combined size of eight central banks’ balance sheets has almost tripled in the last six years from $5.42 trillion to more than $15 trillion and is still on the rise!

Recently, the eight central bank balance sheets have spiked back to 33 percent of world stock market capitalization. This has come about not by lender of last resort loans, but rather by QE expansion (buying bonds with printed money) even faster than world stock markets are rising.

Credit to the real economy is tightening up around the globe. And though central banks are committed to the hope of propping up economic data with money printing and credit pumping, we expect deleveraging to eventually overwhelm the marginal impact of credit-creation efforts in 2012.

Balance sheets among central banks are becoming ridiculously swollen. It’s not clear how much more time they can buy before economies must start showing improvement. The Fed may be smart to hold off on QE3 for as long as possible. Because once they employ it, if it doesn’t have a tangible impact on the real economy, investors may finally lose their patience.

What to Do …

With the central banks moving decisively farther down their preferred path of low interest rates and easy money, risk assets should go up. And if you’re a currency investor, that means the euro should be stronger versus the dollar as long as the ECB and central banks succeed in warding off the risk of sovereign debt contagion.

Right now they are succeeding; but their plan is extremely vulnerable to disruption. Stay tuned.

Best wishes,

JR

P.S. Investing in currencies is as easy as buying a share of IBM. And to help you, I’ve put together my Currencies Made Easy video library — a $995 value — that I’ll send to absolutely FREE just for giving my World Currency Trader service a try.

Many average investors like to think that the performance of the STOCK market is closely tied to the underlying ECONOMY. And in most normal times, that’s true. But the current market environment is anything but normal.

I say that because we’re in the midst of yet another round of money-printing-driven action. The fingerprints are everywhere …

Super-low volume rallies in stocks. Levitation in gold. A slump in the euro first, driven by the European Central Bank’s backdoor money-printing LTRO program, followed by a slump in the dollar, driven by more dovish talk out of the U.S. Federal Reserve.

All these clues tell me that the “asset” economy is floating on a sea of liquidity … for now. Meanwhile, the “real” economy is doing nowhere nearly as good. And that only proves my thesis, once again, that QE is completely ineffective at helping average people on the street find jobs or promoting real, healthy, sustainable economic growth.

But for Wall Street bankers, it means Party Time!

Latest Data Sure Doesn’t
Point to Booming Growth!

Since most of us care more about the real world, I want to start by reviewing the latest data to see what it shows …

* December consumer spending was unchanged, below expectations.

* January consumer confidence, as measured by the Conference Board, slumped to 61.1 from 64.8 a month earlier. That missed expectations.

* January’s Chicago-area manufacturing index fell to 60.2 from 62.2 a month earlier. That missed expectations.

* January’s ADP jobs report showed the addition of 172,000 jobs. That was down significantly from 292,000 in December and below expectations.

* November’s S&P/Case-Shiller figures showed home prices dropping by 3.7 percent year-over-year. That missed expectations.

* December new home sales fell 2.2 percent, while December pending sales of used homes dropped 3.5 percent. Both numbers missed expectations.

Are you seeing a pattern here? Because I sure am!

The markets are floating on a sea of liquidity.

We’re seeing the best start to a year for the stock market since 1997 … despite an economy that’s doing nowhere near as well as the economy did back then.

Why?

The answer is that the Fed, the ECB, the Bank of England, the Bank of Japan, and other central banks are all doing some version of real- or quasi-QE!

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Ride the Wave If You Want …
but Don’t Get Swept Away!

So what’s my advice for this kind of market? What can you do to ride the wave, without getting swept away?

Well, I’ve pared back broad market hedges and focused on a few, select asset classes and companies that can make the most of QE-driven gains … without completely collapsing once the free-money party ends. And that’s working out.

So I suggest you follow the same game plan as long as central bank money printing, rather than underlying economic fundamentals, is driving the bus.

Then a few months or quarters down the road, when investors realize that QE is failing — once again — to spur real economic improvement, I’ll flip right back to the strategy that performed so well last summer. Namely, the use of aggressive downside plays!

If you’re already on board with me, you’ll have access to crucial guidance on when and how to make that switch. But if you haven’t given Safe Money Report a try, then I urge you to consider doing so now.

You can find out more … and get started at a special discounted rate … by clicking here.

Until next time,

Mike

The ETF marketplace changed last month. You didn’t notice? Don’t worry, you’re not alone. Today I’ll tell you all about it.

You already know that “exchange traded funds” trade on an exchange. That’s what distinguishes them from old-fashioned mutual funds. But what exchange trades them, and where is it?

For some new iShares, the answer isn’t New York or Chicago. Their trading hub is Lenexa, Kansas. Let me explain …

Exchange Floors
No Longer Needed

Computers bring order to chaos like this.

For most people, the term “stock exchange” brings to mind images of noisy rooms filled with men in colorful jackets, waving their arms and making cryptic hand motions.

At one time, this is exactly how trading got done — and the apparent chaos was actually very efficient. But now, even the nimblest floor traders can’t compete with the speed and accuracy of modern computers.

An “exchange” isn’t a physical place anymore. It’s a mechanism by which buyers and sellers find each other. Nowadays, it happens in milliseconds.

Not surprisingly, then, there’s no longer a need for traders and exchanges to stay in lower Manhattan. The New York Stock Exchange and Nasdaq don’t get it — yet. They will. Their customers are going BATS.

Kansas: The New ETF Capital

From its headquarters in a Kansas City suburb, BATS Global Markets is now the nation’s third-largest securities exchange. The company launched its first trading system in 2006. Then in 2008, it was acknowledged by the SEC as a “national securities exchange” on par with the NYSE and Nasdaq.

The founders of BATS recognized that stock exchanges are really in the technology business. Trade processing isn’t rocket science, and it doesn’t take financial genius. The keys to success are accuracy, reliability, and low costs.

Locating in Kansas is a great way to keep your expenses down. Everything from office space to taxes is much lower than New York. Over time (and millions of transactions) the difference adds up.

BATS — maybe because it has some distance from the traditional exchange culture — is innovating in other ways, too. The company is planning a “Competitive Liquidity Provider” program that will give market makers a financial incentive to increase liquidity and keep bid/ask spreads tighter.

It’s working: Last year BATS had an 11 percent share of U.S. stock market activity. The firm’s European unit, when combined with another exchange BATS is in the process of acquiring, had a 25 percent market share.

Now BATS is going for the jugular. The upstart wants to lure primary listings away from the big exchanges, starting with ETFs. iShares was the first sponsor to make the leap — but I bet more will follow.

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Why You Should Care!

For small investors, this may seem like “inside baseball.” You may not know or care how it all works. You just want to buy and sell at a fair price. You trust your broker to handle the details.

That’s exactly why you should be glad BATS is on the scene. The competition they’re creating, both for listing fees and trading volume, is what keeps your costs down.

Competition between exchanges saves you money.

So whether you knew it at the time or not, the January 24 launch of iShares MSCI Norway Capped Investable Market Index Fund (ENOR) on BATS was a big deal! ENOR was the first of seven new single-country ETFs from iShares in January. BATS is the primary exchange for all of them. Two more are coming soon.

I don’t know if iShares intends to keep listing new ETFs on BATS. Nevertheless, the vote of confidence from the world’s largest ETF sponsor means something.

Unfortunately, some stock quote services are not yet set up to recognize BATS as the primary (or only) exchange for securities. I expect this to be fixed soon. But in the meantime, you may have a little trouble getting quotes on the BATS-listed ETFs.

Will BATS take over the world? No — there will always be room for competition. But the fact that this firm exists at all is still remarkable.

ETFs were a revolution in themselves. They’ve transformed the entire money management industry. And they are the investments I follow to help my International ETF Trader members profit from ever-changing global market conditions.

Now the revolution is entering a new stage — and you’re set to be one of the winners.

Best wishes,

Ron

It seems that the only thing traders and investors on TV want to do is try to handicap when a bunch of government officials and bureaucrats in Europe will finally make up their minds and solve the crisis still gripping the region.

But while that may be a fun mental exercise, I prefer to use my time looking for good investments to buy. Because when you find a good investment at a compelling valuation, the implications from Europe or any other crisis can be substantially minimized. On top of that, the rewards can be gigantic!

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Take Netflix (NFLX) for example …

NFLX was a darling of Wall Street during much of 2011. That is until the company decided to split its on-line streaming video service and its traditional DVD-by-mail service. In addition, they raised prices on their subscribers.

The customer outrage was incredible, and subscribers cancelled in droves (I was one of them!).

The stock absolutely collapsed, from a high of over $300/share in July, to a low of $62/share in late November, a fall of nearly 80 percent! You would think that given the decline, Netflix was on the brink of going under.

But the company hadn’t lost all of its subscribers. Plus it was trading at a very compelling valuation …

Netflix, at the peak, was trading at 63 times 2011 expected earnings of $4.75/share. At the bottom, it was trading at just 13 times earnings, which was about the same multiple as stodgy, non-growth stocks. At that valuation, there was a valid argument to be made for getting long the shares, even though Wall Street still hated the stock!

Investors who bought in that $60, $70 even $80 dollar range turned out to be right, as shown in the above chart. And last week Netflix’s announcements further confirmed that that had been a smart move …

• The company reported 21.7 million steaming video subscribers, beating expectations,
• The company expects to add between 1.1 million and 1.9 million streaming video subscribers next quarter, besting expectations, and
• The company reported $875 million in revenue for Q4 2011, and over $40 million in net income easily topping Wall Street’s dire expectations.

Buyers who saw the value in this stock have earned a big reward: Shares were up 20 percent in one trading day last week, and hit $125 on Monday, up a jaw-dropping 100 percent from that low in November.

So at this lofty price range, does this mean that Netflix is out of the woods as a business and there’s nothing but higher profits ahead?

Of course not … the valuation is no longer as attractive as it was when shares were at $60.

But the point is that to make money in this market, it’s necessary to look for value in names the Street and the market hate — and try to avoid being obsessed with the latest headlines.

Best wishes,

Tom

Unfortunately, we’re all familiar with the phrase, “too big to fail.”  In fact, we’ve all gotten a wake-up call about the consequences of mostly unregulated interconnectivity and globalization in the financial markets.  It’s not just us anymore.  It’s us and the European Union, Japan, China, South America and on.  And it’s not just the pesky big banks we have to watch, it’s also the global insurance companies.

There are efforts underway to bring standards and monitoring to world financial markets.  And, of course, when there are regulations in the offing, there are those that will look for ways to circumvent them.  So, regulators can’t just make rules for one industry without thinking about the broader effects.   

Click here to read more …

Writing covered calls is a strategy I’ve discussed here before, but I wanted you to know that I am now getting ready to actually start using it for my own dad’s income portfolio.

[Editor's note: This is the same $100,000 account that Nilus shares with his Income Superstars subscribers.]

Why now?

Because, in its essence, covered call writing is a moderately bullish strategy. And in the case of an income portfolio, I actually think it works best if the market remains relatively flat or even pulls back a bit in the short-term.

So, yes, this means I’m less enthusiastic about more short-term market upside than the average analyst is right now.

In addition, options sell for the most money when the markets are volatile — and I think we’re going to see another pickup in wider swings over the next few months.

Remember, When You Write a Covered Call,
You’re Basically Trading Upside for Income

To understand why that is, let’s do a quick recap on the strategy.

Call options are contracts that allow investors to buy a given security at a given price (the “strike”) over a specified timeframe. Each options contract covers 100 shares of the security, known as a “round lot.”

Therefore, when we write a call we’re selling this right to someone else and collecting the premium — the price that the investor is willing to pay for the option — in return.

And the reason this is called covered call writing is because we are writing calls on stocks we own.

Yes, it is entirely possible to create and sell a call for a stock you don’t own, but I DO NOT recommend doing it. Known as “naked” writing, it literally leaves you exposed to lots and lots of risk.

Okay, so let’s say we write a covered call on 100 shares of stock we own.

What next?

As I already mentioned, we will first get the premium paid (minus commissions) deposited into our account. This is ours to keep no matter what.

Then, we wait and see what happens between now and the time the contract expires.

If the stock price fails to rise above the strike price of the contract, the investor who bought our call option will let it expire worthless. We get to keep our stake in the company, any dividends paid, plus the money we collected for the option.

The same is true if the stock goes nowhere or down during the life of the contract. And it’s even true if the stock temporarily goes above the strike price but the investor holding our option fails to exercise it.

Also, once the contract expires we would be free to write a new call with a new strike price and a new timeframe, which means we can continue collecting more and more premiums!

Meanwhile, the last possible scenario is that the stock rises above the strike price and the investor exercises the option before it expires.

In this case, we will be forced to sell our shares to the options holder AT the strike price. Please note that this is our only obligation. We can never be forced to sell the shares at any price other than the strike price!

In other words, the worst thing that can happen with covered call writing is that we will be forced to part with our shares for the predetermined strike price — which means we lose any additional upside from that point on.

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But with covered call writing, we can never suffer any additional downside risk, as long as we pick strike prices that are higher than our entry prices plus commissions!

That makes covered call writing about as foolproof as a strategy can be.

Now, to actually do this in the real world, you first have to get your brokerage account authorized to write options.

Dad and I have already submitted his paperwork to Vanguard, and we should get approval shortly.

The process and time involved might vary a bit based on your broker, but essentially all you should have to do is fill out a form requesting “Level 1 Options” clearance. This allows you to write covered calls, and it is even allowed for IRAs.

A couple final points:

First, I only plan on writing contracts that are “out of the money.” In other words, we’re looking for strike prices that are HIGHER than the underlying stock’s current one — and CERTAINLY higher than the price we paid for the shares (including actual and potential commission costs)!

This is the only way to be sure that we won’t lose money on the covered call strategy.

Second, I will be recommending that dad place limit orders when he writes his covered calls. In other words, I will specify the lowest premium he should be willing to accept for a given contract, and we will use these parameters when submitting orders through Vanguard.

Third, assuming a contract gets written, we will obviously NOT be selling the underlying shares until the contract expires or is exercised.

Based on my preliminary calculations, following these simple rules should help dad earn even more money from his nest egg in the coming year … and I think it’s going to allow us to outperform the market once again in 2012.

I will definitely be sure to keep you posted about how the strategy actually works for us in the real world … and I encourage you to consider this approach for your own portfolio, too.

Best wishes,

Nilus

P.S. I plan on issuing the first covered call recommendations within the next month. So if you aren’t yet a subscriber to my Income Superstars newsletter, now is the perfect time to take a risk-free trial. Joining now will guarantee that you’re on board before we start this new approach … and will ensure that start getting advanced notice on ALL my specific trading ideas going forward.

P.P.S. I don’t think you’ll find another $39-a-year newsletter that has the kind of real-world track record and advanced approaches that Income Superstars offers!