Britannia Radio

Thursday, April 23, 2009 Is the rally still on? We're not so sure... China stepping up its purchases of U.S. Treasury debt... Low housing prices force Americans to cut their spending... Puru Saxena on an inflationary tsunami headed our way...and more! What's China's Game Plan? by Bill Bonner Buenos Aires, Argentina Is the rally still on? We're not sure. Yesterday, the Dow fell 83 points...after a weak bounce on Tuesday. We expected the rally to last until June and to take the Dow back to the 10,000 range. But anything could happen. Gold rose $9 yesterday...back to $892. If you haven't already, there's still time to grab your share of the precious metal - for just a penny per ounce. Act fast... And if you depend on 91-day T-bills for your spending money, you're in a world of hurt. The yield is only 0.13%. But maybe things are better on the other side of the planet. How's China doing? Analysts are "cautiously optimistic," says a New York Times report. Retail spending in China is said to be up 15%. Meanwhile, a report tells us that China is stepping up its purchases of U.S. Treasury debt. Hmmm... Why would China be doing that? The official response to that question is that U.S. Treasury debt is not only the most abundant credit in the world; it is also the most reliable. As to the first point, no one would quibble. As to the second, only a fool wouldn't. The price tag for the crisis-related bailouts, guarantees and boondoggles is nearly $13 billion. The United States is setting records, of course. The biggest budgets ever. The biggest budget deficits ever. The biggest bailouts. The U.S. budget deficit is about 13%. It was a budget deficit of not even half that amount that pushed Argentina over the brink in 2001. What are we supposed to believe...that there is no brink waiting for the United States? Even more curious...what do the Chinese believe? "It's all very strange," said a new friend who came into our Buenos Aires office today. "Americans are clearly cutting back. Their credit cards are maxed out. Their houses are going down in price..." On this last point, we provide a quick update. Bloomberg reports that the average house price actually went up by 0.7% from January to February. But before you begin to think that the housing slump is over, another Bloomberg report tells us that house prices resumed their slide in February - down 6.5%. Charles Hugh Smith argues that not only are house prices still going down - they'll never recover. He gives five reasons, which we've paraphrased below: 1. Bubbles never re-inflate; instead, they go to a new sector 2. Even if nominal prices go up, they will be undercut by inflation 3. More likely, deflation will continue to drive down prices for a long time (Consumer price inflation just came in at a negative number for the first time since the '50s.) 4. The low-interest rate, low-inflation world that permitted high property prices is finished 5. There is no demographic pressure on housing prices; the current stock is sufficient for years. Low housing prices force Americans to cut their spending. "But if Americans don't buy, China will no longer have so much money to recycle into U.S. Treasury bonds. So who will buy all those Treasury bonds?" Bond issuance is running as high and as fast as a 100-year flood. In Britain, recently, a bond auction found itself with more bonds than buyers. Could the same thing happen for the United States? "Well," our friend continued, "I have a darker scenario in mind. What if China had a different game plan? What if she intends to continue buying U.S. bonds as long as she can...leaving the United States completely dependent on Chinese lending? And what if she then suddenly dumps all her bonds and U.S. dollar assets? She would lose a lot of money. But the U.S. economy would suffer far more. The dollar would collapse...so would the US economy...completely. " Hmmm...we don't have a crystal ball, but we do like to be prepared. There's still time to protect yourself from the U.S. government's spending spree. All the resources you need for your own 'personal bailout' are right here. Now, we turn to Addison, who points out some telling trends now underway: "The credit crisis has stymied a unique feature of American society," writes Addison in today's issue of The 5 Min. Forecast. "According to the Census bureau, 35.2 million people changed their residence from March 2008 to March 2009 - the lowest number since 1962. And back then, there were 120 million fewer Americans." "The New York Times does a rather unremarkable job analyzing the trend underway, but they do point to a couple of interesting changes in American society since the 1960s: Home ownership rates have risen and owners are typically less likely to move than renters. The median age of the country has edged up...old people move less often than the young do. But probably the most telling trend underway: two-income families have become more common and increasingly necessary to maintain a middleclass lifestyle. "Finding employment for both spouses in a new location can be challenging," says the NY Times. "And in this environment, it's getting more challenging all the time. The line of American's seeking jobless benefits grew even longer last week, the Labor Department says today. Their gauge of continuing claims - that's people seeking unemployment benefits for more than a week - rose to a new record 6.13 million. New claims inched up 27,000 to 640,000 last week - not a record, but close. "While these numbers look awful - and they are - they'll be a non-event in trading today... this latest report was right in line with Wall Street expectations." Each weekday, Addison brings readers The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments - in five minutes or less. Would you like to receive The 5 Min. Forecast (in its entirety) in your inbox every afternoon? It is possible - The 5 is free to subscribers of Agora Financial's paid publications, such as Lifetime Income Report. This publication's latest special report explains how you don't have to go the traditional route to prepare for your retirement. In fact, it will probably be in your best interest to see what other options are available for you. Learn all about it in this special report: "Plan B" Pensions. And back to Bill, with more thoughts: We're continuing our report on our trip to the ranch. This has no particular financial implication; we just want to tell you what happened. Compuel is what we'd call the 'back 40' in America. Except it's about 10,000 acres...and it's a 4-hour trip on horseback. Still, the cattle have to be rounded up from Compuel annually. Then, they are driven down to the main part of the ranch ...where they are vaccinated against brucellosis and other diseases and parasites...culled...castrated...and generally treated roughly. It takes about 7 hours to drive the herd up over the pass and down to the corrals near the ranch house. The following day, we got up before dawn...by the time we got to the corral, the sky in the East was pink. It was still cold, but warming up fast. Jorge gave the orders. "Javier...you and Cosimir separate out the 'terneros' (young animals)... Pedro and Gustavo, get on the sluices... Senior Bonner, would you like to operate the gate?" Javier is a young man who looks a little like Robert Mitchum, if you can imagine Robert Mitchum as an Incan with a huge wad of coca leaves in his jaw. Javier wore leather chaps and a flat, broad-brimmed Peruvian cowboy hat. He and Cosimir worked fast. They yelled. They whipped. A huge cloud of dust swirled up as they got the whole herd moving in a circle...and then forced the young animals into a second pen...generally by waving their hats at them. Occasionally, the cattle would panic and the two would run for cover. And occasionally, a cow...or a bull...would get annoyed and charge. Javier, particularly, was amazingly fast on his feet. He jumped onto the stone walls of the corral a couple of times. The last calves were lassoed...and dragged them away from their mothers, into the holding pen. Then, they were pushed through a maze of stone walls, where the passage became narrower and narrower, until they finally came to the wooden sluice. It is tight turnstile with a gate on one end and a "sepa" on the other (we couldn't find the word in the dictionary). This sepa is rather ingenious. It is two large pieces of solid wood that open up into a V-shaped passage and then come together - suddenly - like the jaws of a clamp. The cows come through the sluice one at a time. As they come through, the rear gate closes behind them. Then, the sepa at the other end begins to close. As it closes, the cow makes a dash for freedom. But Pedro was working the sepa lever and he rarely missed. As the cow started through the sepa opening, he leaned down hard on the lever and grabbed it by the neck. Then, the hatches on each side of the sluice opened...and the needles came toward the struggling beast. "Mr. Bonner...you're going to have to operate that gate a little faster," said Jorge. "We only want one cow at a time." More tomorrow...we're out of time for today. Until then, Bill Bonner The Daily Reckoning --------------------- Special Offer --------------------------- The Infinite ATM You can withdraw quick, easy cash from your stocks...over and over again. 'The infinite ATM' pays you income. On stocks you may already own. It's that simple. Plus, it doesn't matter if your stock goes up or down. Find out how to get your automatic cash by clicking here. --------------------------------------------------------------- The Daily Reckoning PRESENTS: Though many deflationists would beg to differ, prices in the United States can't stay depressed forever...especially with the printing presses working overtime. Puru Saxena asserts, below, that inflationary forces are headed our way. Read on... Inflation Tsunami by Puru Saxena Hong Kong, China Global central banks are waging an all-out inflationary war on the ongoing credit contraction. The establishment is attempting to thwart the post-bubble deflationary forces via record-low interest rates, deficit spending and quantitative easing (buying assets from newly created money). Over the past 18 months, the post-bubble contraction had the upper hand as it decimated asset prices all over the world. However, it seems as though the consequences of monetary inflation and central bank sponsored debasement are finally starting to dominate. A few days ago, in a bold move, the Federal Reserve announced that it would buy US$1 trillion worth of U.S. Treasuries and mortgage-backed agency debt. Apparently, the idea behind this measure is to subdue long-term interest rates in the United States, thereby assisting homeowners. However, any serious investor should realize that this line of thinking is totally flawed. Allow me to explain: By announcing to the entire world that the Federal Reserve is ready and willing to buy U.S. Treasuries and other agency debt, the Federal Reserve is hoping to support the U.S. bond market and suppress long- term interest-rates. Unfortunately, in order to buy these assets, the Federal Reserve will end up creating even more dollars and the result will be the exact opposite of what the officials set out to do! As the Federal Reserve steps up its buying of U.S. government debt, it would have to create money out of thin air. When this occurs, inflationary expectations will rise and nervous bond investors will automatically demand higher interest-rates in order to protect themselves from inflation. So, as an inflation-premium sets in the market, bond investors will reset interest-rates at a much higher level. It is worth noting that the U.S. establishment engaged in the same misguided policy roughly 60 years ago and the result was much higher interest- rates...and that saga morphed into the inflationary holocaust of the late 1970s. This time around, the Federal Reserve is making the same mistake and (once again) the end result will be an inflationary tsunami! In fact, I would argue that by buying U.S. Treasuries after a 28-year bull-market in U.S. government bonds, the Federal Reserve is following in the foot steps of the Bank of England which infamously sold all of Britain's gold at the lows of a 21-year bear-market. Never underestimate the genius of central banking! "Throughout recorded history, massive surges in the supply of money and credit have always led to rising prices in some parts of the economy and there is no reason to conclude that this time should be any different." Make no mistake, Mr. Bernanke has studied the Great Depression of the 1930s and he is now in charge of the printing press. You can bet anything that he will continue to flood the banking system with trillions of newly created dollars. When this additional money works its way into the economy, asset prices will rise. It is worth noting that both the supply of money and credit in the United States continue to expand at a furious pace. Despite the ongoing secular deleveraging in the private-sector, total credit in the United States is still expanding due to the frantic borrowing efforts of the U.S. establishment. Although the private- sector credit bubble in the United States burst last year, Mr. Obama's administration is borrowing enough money to more than offset the private-sector credit contraction. There can be no doubt that this development is extremely inflationary and will cause commodity and consumer prices to skyrocket in the years ahead. Throughout recorded history, massive surges in the supply of money and credit have always led to rising prices in some parts of the economy and there is no reason to conclude that this time should be any different. Today, there are many deflationists who are claiming that the prices will remain depressed for many years due to the weak economic activity. However, these folks should note that even during the Great Depression of the 1930s, prices of commodities stabilised and began rising in 1933. Figure 1 confirms that due to monetary inflation in the early 1930s, the CRB Index embarked on a secular bull-market which had a violent correction in 1937 (marked by purple arrow). Following that crash, commodities bottomed out in 1938 and thanks to the super- inflationary efforts of President Roosevelt, the CRB Index surged for more than a decade. Figure 1: CRB Spot Index - (1930-2007) Source: Commodities Research Bureau Contrary to popular opinion, that huge commodities boom took place despite an economic depression. Furthermore, it is worth pointing out that commodities rose relentlessly despite the fact that private-sector debt and bank lending remained essentially flat until 1945. Back then, similar to the current situation, banks accumulated large reserves but didn't loan these reserves into the broad economy. However, from 1932 onwards, the US government borrowed so much new money into existence that prices began to rise way before private-sector credit started to expand. A similar drama unfolded in the 1970s when commodities went through the roof. During that time, economic activity was dismal but governments decided to tackle the recession with money creation. The net result was surging hard asset prices and mind-numbing inflation! Turning to the present situation, U.S. private-sector debt is shrinking as banks remain fearful of lending. However, the U.S. government (along with other nations) is borrowing and creating gigantic sums of money and this should cause prices to rise for the next 3-4 years. Accordingly, we are maintaining our positions in top-quality businesses in the resources sector. Finally, in the short-term, most metals are over-bought and the usual summer correction will probably unfold. So, investors may want to wait for a pullback before adding to their positions. Precious metals have a tendency to form an important top during spring and it is likely that we may see lower prices in the weeks ahead. Regards, Puru Saxena for The Daily Reckoning Editor's Note: Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm that manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs. Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription here. --------------------- Special Offer --------------------------- Imagine Getting Rich as Ignored Stocks Soar Scientifically selected penny stocks beat the pants off the Dow, the NASDAQ and the S&P 500... 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