Britannia Radio

The Daily Reckoning U.S. Edition

Home . Archives . Unsubscribe

The Daily Reckoning | Thursday, April 29, 2010 A bullish trend in commodities - more than just a "jiggle," Wanna whack inflation? Go short Treasurys with this ETF, Plus, Bill Bonner with some thoughts on "Fabulous Fab" and the fate of western welfare economies... If Wishing Made it True 3 Reasons for the Commodity Bull Market Eric Fry Reporting from Laguna Beach, California... "The wheels on the bus go round and round...round and round...round and round," according to a familiar children's song. The song never tells us what happens when the bus rips through a guardrail and plunges down a ravine. But the stock market might soon solve that mystery for us. For the better part of a year, the wheels on the stock market have been going round and round. The ride has been delightful. The smooth highway of post-crisis optimism has whisked the stock market along its way. From the 12-year lows of March 9, 2009, the S&P 500 Index has advanced more than 70%. But the road ahead looks much less inviting. The stock market must now try to steer through the narrow, rutted switchbacks of serious sovereign credit problems, resurgent inflation and a US economy that still struggles to get out of bed every morning. Earlier this week, the credit rating of Greece and the reputation of Goldman Sachs were both downgraded to "junk" status. Neither downgrade was a surprise. But both downgrades seemed to jostle the bus a little closer to the guardrail. Scary headlines should not necessarily scare the market. But scary headlines that contain subliminal messages like "the Western nations are bankrupt" or "America's most influential Wall Street firm is systematically cheating" are the kind of headlines that should scare investors...at least a little. We're not talking doom and gloom (again), folks. We're just saying that wishes aren't truths. We wish Greece could pay its bills; and we wish Goldman wasn't dishonest. But that doesn't mean we'll be tossing pennies in a wishing well and loading up on S&P 500 futures. Greece and Goldman are both serious roadside hazards. Even though they have not caused any serious crack-ups yet, they have caused some serious delays. The stock market has gone nowhere for almost a month. Commodities, by contrast, have gone somewhere. The CRB commodity index is up more than 8% from its February lows. Gold is up 10% since then. Why would commodities be rallying so noticeably, even when the stock market is not? Is the answer that the commodity market: A) Senses a budding inflationary trend in the US? B) Detects the European Central Bank will implement inflationary tactics in response to the credit woes of Greece, Portugal, Spain...and a roster of profligates to be named later. C) Anticipates credit woes in the US that will prompt an even more inflationary response from the Fed and Treasury. D) All the above. "D" would get our vote. And we suspect the bullish tone in the commodities pits is something more than what Jim Rogers calls a "jiggle." We suspect the commodity markets have re-awakened for good reason...and maybe for many good reasons. One of the good reasons to buy a bit of gold, for example, is that the world is running out of good reasons to buy euros. This currency-by- committee is coming under serious pressure, as the committee struggles to devise ways to make one plus one equal three. The chart above depicts the gold price in euros, compared to the gold price in dollars. Although gold is advancing both currencies, it is making much greater headway against the euro. Ergo, the euro is even more suspect than the dollar. Clearly, investors are becoming increasingly concerned about the euro's long-term purchasing power, and perhaps about its long-term viability. Your editors share that concern, and they are also concerned about the long-term purchasing power of a share of Goldman Sachs. But we refuse to embrace any kind of doom and gloom about either Greece or Goldman. Instead, our message is positive and bullish. We are bullish on inflation; bullish on gold; bullish on Goldman put options and most of all, bullish on volatility. Buckle-up for safety! The Daily Reckoning Presents Sell Treasuries...Again AddisonWiggin "Shorting US Treasuries is a slam-dunk trade if ever there was one," our friend Paul Van Eeden wrote not long ago. I agree. Treasury yields have been going down along the entire yield curve since 1983. This trend reached a crescendo during the crisis of 2008, when 10-year Treasury yields plunged to 2% and 90-day T-bills paid negative yields. For a few moments in the heat of the credit crisis, some investors were so scared of losing money in any other asset; they took a guaranteed loss just to keep their money "safe." Better to lose 0.1% on a short- term bond, the theory went, than risk losing 50% on GE, Citigroup, GM or Bank of America. The US government recognized this insatiable thirst for the "security" of American bonds. And it abused this opportunity to the fullest extent - setting record budget deficits in 2008, 2009, 2010 and likely beyond. Mainstream economists like Paul Krugman, James Galbraith and Dean Baker applaud these deficits as a necessary remedy for economic malaise. They maintain that when consumers can no longer consume and corporations are locked out of the credit markets, the government is the only actor in the economy that can save us all from financial Armageddon. Further, they argue that inflation is the devil we know whereas deflation is the devil we don't want to know. They argue the government is not spending enough money right now, and that those who encourage fiscal restraint and austerity during an economic downturn are only asking for more trouble, more pain. Further, they say, it is the government's responsibility to coax inflation back into the system, which would in turn spur growth in GDP. Then when the economy gets "back on track," we can deal with the deficits and begin addressing the national debt. Trouble is, since the 1980s, we've never, but for a few short years in the late 1990s, gotten to the second half of that Keynesian equation. As one reader insightfully observed: "Keynesian economics really does (or did) have a legitimate function in a capitalist economy wracked by business cycles. Any honest, solvent government can use Keynesian strategies to good ends when a cycle tanks. "The problem, which you guys so rightly observe is that our government is far from solvent; it uses what are called 'Keynesian' strategies to mask what Marx would have called 'internal contradictions' - and it's not being honest with itself or its citizens, either. What we see now is not Keynesian - it's simply consequences of overreach by an empire in decline. It's not Keynesian at all, just chronic overspending." Following what we feel is a deeply flawed economic strategy, the Obama administration issued over $2 trillion in government bonds - a record, by a long shot. Mostly with the help of Asian governments, the Treasury managed to sell them all. But many thanks go to the Federal Reserve itself. Through its program of quantitative easing, the Fed bought billions upon billions of Treasury paper to suppress American mortgage rates and ease the pain of the housing bust. This, to put it bluntly, cannot last. The Fed ended quantitative easing on March 30. Mortgage rates have already reached an eight-month high since then. But the real threat to the plan to keep rates low may come from outside the Fed's purview. On January 25, 2010, the Obama administration announced a $6.4 billion arms deal with Taiwan. Two weeks later, the Treasury auctioned $16 billion in 30-year Treasury bonds. The Chinese failed to show up in customary fashion. Yields ticked up from 4.68% to 4.72% by the end of the auction. The fear that the Chinese would simply slow their consumption of US debt was all that was needed to drive up rates in the US. The worst inflations in history took place when savers and investors lost confidence in the integrity of the currency, while governments handed out purchasing power to entities that did not earn this purchasing power through past production. By promising to suppress dollar-based interest rates well into the future, the Fed is giving investors little reason for faith in the dollar. Except for the inherent weakness of the euro, the dollar would already have "exited stage left." The American government cannot continue financing bailouts and future growth with borrowed money. The national debt stands at 90% of annual GDP, the highest since World War II. In the face of looming entitlement disasters like Medicare and Social Security, our debts might grow even larger... but our creditors will assuredly not grow any kinder. "We are very concerned about the lack of stability in the US dollar," Chinese Premier Wen Jaibao said last month. He oversees the biggest cache of US government debt in the world - roughly $889 billion in US Treasuries. As China's worries grow - along with the rest of the world's - creditors will demand higher rates of return. Bond yields will go up, prices will go down. What's more, China and many other foreign creditors have historically bought Treasuries in order to suppress the value of their currencies. Now that so many emerging markets have "emerged," currency suppression isn't providing the boost that it used to. If inflation becomes a problem in emerging markets, currency suppression will cease to become an objective. This would also remove a major source of demand for Treasuries. When will it happen? How bad will it get? We don't know. But our money says it'll happen in the next 10 years. Holders of US debt will wish they were holding something - anything - else. Anything but the promise of a fixed stream of steadily debased US dollars. Investors will wish they sold US bonds short when they had the chance. So how do you short US bonds without going to the trouble of borrowing them? Fortunately, there's an exchange-traded fund (ETF) that lets you do just that. The ProShares Short 20+ Year Treasury ETF (NYSE:TBF) returns the daily inverse of TLT, the Barclays 20+ Year US Treasury Index. The focus is on long-dated bonds - the securities that Treasury will have the most trouble floating if global confidence in US debt wanes. In the last half of March, Treasury had a series of lousy auctions. TBF responded just as you'd want it to - rising 2% in just a couple of weeks. This is just the beginning. All of that probably makes intuitive sense to you. After all, we're betting against an investment class that's gone nowhere but up over the last generation. So don't be surprised if this asset goes nowhere but down during this generation. Addison Wiggin for The Daily Reckoning Joel's Note: The latest issue of Addison Wiggin's Apogee Advisory is online now...and he's not charging you a cent to check it out. It's all part of his "beta-test" deal, where you get to test drive his service for three months - gratis - to see if it's right for you. In this issue: How to cash in on the "world's most hated" asset class, making the most of America's outsourcing trend and everything they're NOT talking about in Washington DC. Access it here...free. Bill Bonner Poor Fab Tourre: Indignation Over the Goldman Scapegoat Bill Bonner Reckoning from Baltimore, Maryland... Poor Fabulous Fab. The young Frenchman went to all the right schools in Paris. He must have been good at math, because he got into Stanford. And then, it was onward and upward... He landed a job at Goldman. He was making millions. His girlfriend wrote to say how she'd like to curl up in his arms. And then, at the tender age of 31, powee! Right in the kisser. His beautiful derivatives lost 85% of its value in just 5 months, his clients get sore and now he's got a whole posse of senators on his tail. The senate torturers didn't have any idea what Fabulous Fab was up to. They wouldn't know a derivative contract from a household fusebox. But they knew something had gone wrong. They knew the public was out for blood. And they knew the lights were on and cameras were rolling. This was the time to impress the rubes back home. Get some Wall Street hotshot in the dock and grill him hard. And a Frenchman to boot! What luck. I-N-D-I-G-N-A-T-I-O-N! The senators were positively shocked...shocked!...to discover that Fab...and Goldman...were out to make money. Maybe they thought the Goldman was a public utility - like Amtrak or the Post Office. Government services don't work very well, they may have told themselves, but at least they don't make any money! Yes, senators can feign indignation when it is called for. But what are they so indignant about? Well, that's another matter. Who knows and who cares! The point is, the voters want to see them nail this little Frenchman...and they're going to make a good show of it. The media reports suggest that everyone played along on Tuesday. The senators were indignant. The Goldman fellow denied any wrongdoing...but regretted that had sent the emails out. While the senators pretended indignation, the Frenchman's regret was certainly sincere. So was his denial. For, in fact, it's hard to know what he did wrong. Yes, he played his clients for suckers, but so what? That's what Fab Finance is all about - make money...and then dump the risk onto someone too dumb to know what he's doing. And then, when he blows up...and the whole system blows up...in come the senators to bail everyone out. From Fab's perspective - and ours - if you can find bankers and hedge funds dim enough to take your derivative contracts - without wondering what is in them - you are performing a public service by separating them from their money. Better for the cash to be in the hands of someone who knows what to do with it - like Fabulous Fab himself. But let us imagine that Fabulous Fab gets his hands on some real dough. And let's imagine that he is not in the mood to gamble on his own jackass derivatives...or to find some chump to sell them to. What would he do with the money? Ah...here, he would have to close his newspaper and turn off his television and think deeply about what is actually going on in the world. Forget the circus surrounding Goldman. Forget the news flow. Forget even the 'information' coming from the markets. Now, it's time to think. This is real money we're talking about...not just casino chips. Fab is no dope. He'd probably look at what is happening with Greek debt...and he'd be suspicious of all government bonds. After all, Greece's finances are not so different from a half-dozen other countries - including the US of A. True, Greece's debt problems have investors running to the relative safety of the US...which lowers borrowing costs for the US and makes it easier for the feds to finance their debt. But the problem of too much public debt can't be solved by low interest rates and more debt. Eventually, the US runs into the same problem the Greeks face now. Only the US problem is even bigger...and there is no bigger, richer nation to bail it out. Fab figures all of that out... He figures US lending rates may go down in the short run, but in the long run, the feds face the same predicament - they need to borrow more and more money just to keep the show on the road. And eventually, lenders will want higher interest rates. And it won't be too long before Moody's and Standard and Poor's take a hard look at America's balance sheet too. The news yesterday was that the rating agencies may downgrade Spain, Portugal, and Ireland even further. And Reuters reported that the Greek debt alone would cost bondholders $265 million - if Greece has to reschedule (that is, if Greece defaults on its loans). Greece now. Then Spain. Then Ireland. Then Britain. Then America. And more thoughts: Our "Crash Alert" flag is still flying. It's been up there for so long it's gotten a bit faded and tattered. But we leave it up; we never know when we will need it. The Dow bounced yesterday - up 53 points after taking a big fall on Tuesday. Gold rose $9...and seems, once again, to be readying for a move on the $1,200 level. Which brings us back to Fabulous Fab. What would he do if he had some really big money? Would he buy stocks? If he's smart he'd stay away from them. This market could crack at any time. Stocks are cheap. And there are too many threats coming from too many different directions compared to the limited upside potential. Would he buy bonds? Nope...bonds could surprise us all as de-leveraging resumes in earnest. They could be the only thing that resists a general turn-down in asset prices. But who's going to bet on a depression? Not Fabulous Fab. If he had big money, he'd just want to park some money safely...not gamble on the outside chance of a deeper slump. So what does he do? He buys gold. That is why gold continues to creep up. The big money wants to protect itself. And it's getting wary of government debt. *** What's going on in Arizona? The state legislature has passed a law that allows the police to stop anyone on the street and ask him for his papers. If his papers are not in order, the fellow is in trouble. The idea is to discourage illegal immigrants. Here at The Daily Reckoning our views on immigration are about as unpopular as our views on everything else. We listen to CNN en Espagnol in the morning. From what we can tell, immigrants from across the border are doing the country a big service. And illegal immigrants are the best kind. They work cheap. They stay out of trouble. They use few public services. And they don't vote. What's more, they know how to dance. If we were all illegal immigrants, the country would have a much healthier economy. Labor rates would fall to levels where we could compete with other exporters. Social costs - food stamps, unemployment compensation, social security, medicare/aid - would drop. And non- voters couldn't demand more bread and circuses from the legislature (currently, 47% of voters pay no taxes...) Meanwhile, our old friend Jim Davidson thinks he's spotted a new trend. For the first time ever, he says, immigration - legal or illegal - is not a problem: "Note that according to the Center for Immigration Studies, a think tank that agitates for tighter border controls, the number of illegal immigrants living in the United States declined to 11 million in 2008 from 12.5 million in 2007. For the first time since the depths of the Great Depression in the early 1930s, more persons appear to have left the US than moved in." This is typical of a nation in decline, says Jim. It's what happened to Great Britain after it lost its empire. And now, there's a new phenomenon: the illegal EMIGRANT. First this news item from The New York Times: WASHINGTON - Amid mounting frustration over taxation and banking problems, small but growing numbers of overseas Americans are taking the weighty step of renouncing their citizenship. The Federal Register, the government publication that records such decisions, shows that 502 expatriates gave up their US citizenship or permanent residency status in the last quarter of 2009. That is a tiny portion of the 5.2 million Americans estimated by the State Department to be living abroad. Still, 502 was the largest quarterly figure in years, more than twice the total for all of 2008, and it looms larger, given how agonizing the decision can be. There were 235 renunciations in 2008 and 743 last year. Waiting periods to meet with consular officers to formalize renunciations have grown. It is not easy to renounce your citizenship. If you are wealthy, the costs can be very high, as the feds try to punish you for leaving. Davidson comments: Just as there are "illegal immigrants" to the United States, so there are also now growing numbers of "illegal emigrants" from the United States. While statistics are necessarily sketchy, evidence suggests that there has been a dramatic upsurge in the number of US persons living abroad. According to the Association of Americans Resident Overseas, (AARO) apart from the military and other US government employees, 5.26 million US citizens reside abroad, a 67 percent increase since 2008. "Among the benefits the study cites of a life abroad are statistics that show expats earn more, pay less tax, have a better work/life balance, have an improved quality of life, enjoy broader cultural opportunities, and enjoy better job prospects." In the opinion of the US State Department the AARO estimate is 25% too low. The State Department suggests that about 1.34 million Americans have become "illegal emigrants," which is to say that they have gone abroad and "fallen off the radar." As one report stated, "If an American living abroad stops paying their taxes, stops visiting the US, stops using embassy or consulate services they will not be OFFICIALLY counted anymore." Regards, Bill Bonner, for The Daily Reckoning ------------------------------------------------------- And a final word from your Taipei-based editor, Joel Bowman... We just wanted to say a quick "thanks" to everyone who took part in our coin survey over the past few days. We've had a ton of responses and we're using them to help frame the upcoming web interview we're conducting with Nick Bruyer, CEO of First Federal Coins, and the heads of the two major grading agencies, PCGS and NGC. So, what did your responses tell us? It should come as little surprise that many our fellow reckoners are as concerned about inflation as we are. In fact, approximately four fifths of survey respondents who own precious coins said they do so as a hedge against that exact, printing press-induced evil. A little over half of those same respondents told us they hold gold coins; around one third (34%) said they hold silver coins. As far as the most popular varieties? A whopping 77% of you hoard US Eagles, 41% stash Canadian Maple Leafs, 30% hold Krugerrands and a not- insignificant 23% have one or two China Pandas stuffed under their mattresses. We'll let you know as soon as the interview - which we'll be offering for free - goes live. In the meantime, you still have time to take our survey. It takes about 3 minutes - if that - and you get a free Beginner's Guide to Coin Investing report for your troubles. The survey will be up until the end of the day today. Here's a link. Again, thanks for helping us out. Cheers, Joel Bowman Managing Editor for The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com