 | | The Daily Reckoning | Wednesday, January 26, 2011 |
- Tales from Ben Bernanke's Marvelous Money Machine,
- Time for profit hunters to attempt a GDX "hat trick,"
- Plus, Bill Bonner with more dreamy State of the Union remarks...
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Why China Is About To Bring America To Its Knees...
The world is 97% dependent on supply of these little-known resources from the red dragon.
At stake is America's ability to create cell phones, hybrid car batteries, even our high-tech military equipment...
They are about to shut supplies of this vital resource off from the rest of the world... FOREVER!
Click here to see how to make 8,577% gains or more from the greatest global supply squeeze in modern history.
|  | | | The Amazing 7-Cent Nickel | | Why the smart money is trading dollar bills for hard assets | |  | | Eric Fry |
Wishing he owned more devaluing dollars, reports...
"With each passing day," we observed last week, "inflation seems less and less a theoretical fiction, and more and more a genuine threat... No self-respecting economist or self-aggrandizing central banker is acknowledging any inflationary risk whatsoever," we continued. "But the indifferent data points of real-world prices testify to the contrary."
Shortly after airing these remarks we learned that import prices soared 1.2% during the month of December alone - lifting the year-over-year surge in import prices to 4.7%. The following day we learned that producer prices jumped 3.8% year-over-year. A few days after that, the Federal Reserve Bank of Philadelphia announced that producer prices in the Philadelphia region had jumped to their highest levels since July 2008.
These data points do not prove that an inflationary threat is stirring, but they do offer compelling testimony. Meanwhile, commodity prices are providing ample corroborating evidence. During the past eight months, the Reuters/Jefferies CRB Index of commodity prices has soared 32% - far outpacing the stock market over that timeframe. The grain complex, in particular, has been on a tear, as the prices of both wheat and corn have nearly doubled since last summer
These eye-popping gains may be exceptional, but they are hardly unique. All but one of the 19 commodities in the CRB Index has advanced during the last two years.
All the smart folks on CNBC are calling this a bubble. The rest of us are calling it a bull market. The smart folks say, "Sell commodities, especially gold." The rest of us keep buying the stuff because we can't think of anything better to do...and can't think of any better way to protect ourselves from the toxic inflationary plume that is spewing from Ben Bernanke's Marvelous Money Machine.
The longer Ben's machine churns out dollar bills, the greater the imperative to trade dollar bills for hard assets...or nickels.
Yes, it's true; the value of a nickel is soaring, even as the value of a dollar is slumping. That's because every nickel that rolls out of the US Mint contains about 3.75 grams of copper and about 1.25 grams of nickel. Current metallic value: 6.8 cents per nickel.
We present this illustration merely to underscore the obvious: A small piece of imprinted paper contains less real-world value than a small piece of copper and nickel.
Furthermore, as your editor pointed out in an ancient edition of The Rude Awakening, "a US dollar is a poor conductor of electricity and combusts near an open flame. It contains no measurable quantity of any element on the Periodic Table, nor any resource whatsoever that could contribute to any industrial application. Rather, a dollar contains little more than a politician's IOU."
The nation that issues both dollars and nickels is the same nation that spends more than it earns, that imports more than it exports and that relies upon massive foreign borrowing to sustain its bizarre breed of prosperity.
If current trends continue, a nickel might soon buy more than a dollar.
In the column below, Dan Amoss, the mind behind the Strategic Short Report, offers a different sort of "inflation trade."
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Prepare for even WORSE fiscal policies coming out of Washington in 2011!
If you thought 2010 saw Washington enact its most reckless policies yet, brace yourself for what's coming in 2011!
Weiss Research analyst Larry Eielson says Obama, Bernanke, Geithner, and the rest of our nation's policymakers are going to wreak further havoc on the value of your money this year. Fortunately, Larry has lined up some investments that can not only protect the wealth you've already built ... but also help you go for substantial profits as lawmakers continue to play chicken with our nation's finances.
For all the details, watch Larry's free web briefing right now. Just turn up your computer's speakers and click here.
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| | The Daily Reckoning Presents | | Time to Buy Gold Stocks...Again | |  | | Dan Amoss |
It's time to buy gold stocks. Top-down "macro" analysis indicates that the bull market in gold stocks still has a long way to go. And bottom- up analysis tells me that gold stocks are cheap.
Buying opportunities in this asset class will be rare, simply because so many institutional investor portfolios remain hugely underweight gold. These investors will keep looking to add exposure to gold because of the dismal state of the private credit markets, government debts and central banks. Western central banks are trashing their own currencies at unprecedented rates, while Eastern central banks are slowly tightening policy and accumulating gold bullion.
If current trends in government spending and central banking continue, gold could soar to multiples of its current price. If, under these conditions, central banks continue to inflate, then a hyperinflationary destruction of the monetary system is almost certain. But rather than a total wipeout of the system, I expect we'll eventually see the end (not a reversal) of quantitative easing programs and a re-pegging of the dollar to gold at much higher gold prices.
But that won't happen in a day. Inflationary forces need to gather some momentum first.
What might that process look like? Well, let's say that the Fed doubles the size of its balance sheet yet again, all while the market's expectation of future inflation steadily rises. The selling pressure on Treasuries would steadily grow, undermining the value of the Treasuries already sitting on the Fed's balance sheet. On a mark-to-market basis, the equity on the Fed's balance sheet would become negative - by several hundreds of billions of dollars.
Are we to expect, at that point, that the Fed would start to unwind its Treasury portfolio, selling it back into the hands of the public at much lower prices? If so, such selling of Treasuries (a reversal of QE) would lock in hundreds of billions of losses, requiring taxpayers to recapitalize the Fed (although not if Congressman Ron Paul has enough political influence).
Plus, from a technical perspective, the act of dumping Treasuries into an already panicked market would at least temporarily drive prices down (and yields up) even further. Finally, in such an environment a few years out, the $16-18 trillion in US national debt (at that point), which has a short duration, would have to be refinanced at much higher rates. That would put the US government budget in a position similar to that facing the Greek government in 2010: it would have to choose between:
1) Defaulting/restructuring;
2) Totally inflating the value of the debt away or;
3) Crushing the private sector economy by sucking incredible amounts of taxes and fees out of it, simply to pay interest on the national debt. Now can you imagine how, in the coming years, gold and gold stocks could launch into hyperbolic rallies? Inflation - as long as the bond market tolerates it - remains the most politically popular way of dealing with unaffordable government debts.
The market's reaction to radical central bank policies is something we don't see discussed very often. Yet this single factor - the reaction to QE - will be the key driver of financial markets in coming years.
Paper currencies rely on confidence, and central bankers only maintain confidence by offering to pay a real rate of interest on deposits. With interest rates currently near zero, the only reason to expect confidence to remain high would be if holders of that currency expected future prices to remain tame.
Only after a widespread repudiation of government paper would central banks re-peg their currencies to gold. They wouldn't do this because they want to. Rather, they would re-peg currencies to gold simply to restore confidence in paper money. Most central bankers like to inflate as much as they deem necessary to fill the "output gaps" in their ivory tower models. The notion that monetizing the federal deficit (QE) can lower the US unemployment rate is so ridiculous that only an academic could dream it up; it demonstrates ignorance about how the US economy functions.
This is a constantly evolving process. But for right now, I see the most likely macro scenario as follows: a steady rally in gold, a sideways stock market (some sectors up, some down) and falling Treasury bonds (rising yields), as more bond investors look ahead to a future of endless US budget deficits and decide to hit the Fed's "QE2" bid.
The Fed's balance sheet will probably double in size again over the next few years, filling up with even more Treasuries. The central banks in China, India and elsewhere are woefully short of gold - and stuffed to the brim with less desirable US dollar assets - so they should continue to trade paper for gold and other real assets at a steady pace.
The current ten-year bull market in gold is very rational; it's a reaction to the explosion in the US money supply plus the explosion in US dollar assets overseas (which are a result of seemingly endless US trade deficits). More than an inflation hedge, gold is a hedge against chaos in the monetary system; people flee to gold when confidence in paper money crashes.
Today's global monetary system remains chaotic, so demand for gold stocks will remain strong...
Twice in the recent past I advised the subscribers of the Strategic Short Report to buy calls on the Market Vectors Gold Miners ETF (GDX)...and I did not neglect to issue profitable "sell" recommendations. Based on the published recommendations the first GDX option trade - from Nov. 2008 to Feb. 2009 - gained about 330%. The second option trade - from April 2009 to Nov. 2009 - gained about 65%. I think it's time to attempt a "hat trick." I suggest buying long-dated call options on GDX.
Gold stocks may not be dirt-cheap like they were in late 2008, but they remain relativelycheap. The nearby chart shows the ratio of the HUI index (a basket of 16 un-hedged gold stocks) to the price of gold. Other than the exceptional low of late 2008, the HUI/gold ratio is as low as it's been since 2003. Furthermore, Gold stocks are as cheap (relative to cash profit margins) as they have been since they bottomed in 2001.
Given these factors, along with the continuing chaos in the sovereign debt markets around the world, I would not be surprised to see the gold price rise into new record. Accordingly, I would not be surprised to see the HUI Index double during the next couple of years.
Regards,
Dan Amoss,
for The Daily Reckoning
Joel's Note: In addition to his stellar gold trades, mentioned above, Dan's been at the very fore when it comes to calling out companies due for serious corrections. These are overleveraged, undercapitalized outfits that can't fool investors forever. Think Lehman Bros., for example. Dan's readers cashed out over 370% on that trade. If you'd like to get the specifics of Dan's next move, you'll have to get on board his Strategic Short Reportmailing list. He explains exactly how to get set up today, right here.
| | | | The (common sense) Truth about Inflation... |
If you think inflation is good for the economy, why isn't Zimbabwe the wealthiest nation on earth?
In Chris Mayer's brand new video presentation he destroys the popular myth that inflation stimulates the economy and create jobs. He also reveals the sickening truth behind Washington's endorsement of runaway money printing.
Please, don't do anything else until you've learned the TRUTH...
Click here to watch your FREE presentation now.
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| | | | Bill Bonner | | Dreaming of a Balanced Budget | |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
Well, the president gave a bum speech. Full of empty phrases. Hollow words. It was deep space for real ideas; there was nothing there...
And yet, he gave it so sincerely...you almost felt sorry for him. He would have made such a good college president or undertaker. Sad to see him waste his talents in politics.
We were disappointed, too, that he didn't use any of our ideas. Don't expect a balanced budget for this year...or any year of this president's administration. Instead, he'll add 75% to the nation's official national debt - three times more than all the presidents who came before him put together.
Now, that's an achievement. Something to be proud of. Something he can put on his tombstone.
Here Lies Barack H. Obama. America's 44th president.
He bankrupted the US government. And he could have achieved greatness. We had a dream about it. After the State of the Union address, we imagined a different speech:
"My fellow Americans, I know this is a go-along, get-along town. Everybody gets something. If you're well connected you get a lot. If you're not so well connected, you get less. Well, I'm not going along anymore. Instead, I'm going to change the rules...so that everyone has a fair chance of getting along.
"I propose to get rid of the phony dollar and re-introduce the real dollar. The dollar will be henceforth exchangeable at the rate of $1,500 per ounce. No questions asked. You give us $1,500 dollars; we'll give you an ounce of gold.
"And the US government budget will be balanced. We'll spend what we collect in taxes. Not a penny more.
"Of course, if you gentlemen and ladies want to raise taxes, I'll let you explain why to the voters..." Whoa. With those two reforms he could save America from bankruptcy...and put the whole world economy back on solid footing.
And if he wanted to make the US economy the world's top performing economy he could go even further:
"I'm also introducing a flat 10% rate. I don't care how you earned your money. I don't care if you're a citizen or an alien from outer space. If you live in the US, you send me a postcard. Tell us how much you earned last year, and send us 10% of it." Can you imagine? There would be a renaissance...a boom...a revival...like you've never seen.
Not that there wouldn't be problems. Big problems, even. But at least there wouldn't be any problem with the dollar...or the US public finances.
But it was only a dream, wasn't it? And a waste of time. It's never going to happen. We'll explain why, below. Tonight, we're going back to dreaming about women. It's more fun.
Stocks were flat yesterday. Gold dropped $12.
Gold is dipping. How deep will the dip dip? We don't know. But people who try to time the gold market almost never do well. They get out to avoid the dips. Then, gold shoots up again. The speculators are out of luck. They can't bring themselves to buy back in at a higher price. So they miss the explosive final stage of the bull market.
What to do about it? Don't speculate. Buy gold as a way to save money. Then, think of it as you would a collectible...or an heirloom. Don't worry about the price. Just hold on. By 2015, you'll probably be able to use a few ounces to buy a new house.
But remember this: there will also be a time when it makes sense to sell gold. When you can buy all the Dow stocks for a single ounce of gold...it's time to get out of gold and back into stocks. Right now, the Dow is a little under 12,000. And an ounce of gold is only $1,335. Our guess is that the Dow will collapse to under 5,000...while the price of gold soars to over 4,000. Get ready!
When? Hey, you're asking too much from a free e-letter. Just stay tuned.
And more thoughts...
There are two legs to American household wealth - jobs and housing. Here's the latest on housing from The New York Times:
The long-predicted double-dip in housing has begun, with cities across the country falling to their lowest point in many years, data released Tuesday showed.
Prices in 20 major metropolitan areas fell 1 percent in November from October, according to the Standard & Poor's Case-Shiller Home Price Index. The index is only 3.3 percent above the low it reached in April 2009 and has fallen fell 1.6 percent from a year ago.
Prices in Atlanta and Chicago fell more than 7 percent, exceeding even the drops in the perennially troubled Detroit and Las Vegas. Housing is still going down. If you don't mind, we'll repeat what we said yesterday:
"House prices expected to decline for a fifth successive year," says The Financial Times.
Foreclosures are rising and will continue to rise until March of 2012, according to the projections in the FT, wiping out possibly trillions more in household wealth. Sales are at a 13-year low.
Houses are Americans' most important asset. And the average house is down about 25% since 2006. But that's in terms of dollars. In terms of gold, the loss is over 60%. Okay... Well, it looks like households are hopping on one leg. Now, let's look at the good leg, employment.
Whoa... What's this?
WASHINGTON (AP) - The unemployment rate rose in 20 states last month as employers in most states shed jobs.
The Labor Department says the unemployment rate rose in 20 states and fell in 15. It was unchanged in another 15 states. That's nearly the same as in November, when the rate rose in 21 states, fell in 15 and was the same in 14.
The report is evidence that the job market is barely improving even as the economy grows. Most economists expect hiring to pick up this year, although the unemployment rate will likely remain high.
Employers in most states didn't add any net new jobs last month. The number of jobs on employer payrolls fell in 35 states in December, the department said. Only 15 states reported gains. Layoffs have slowed dramatically in the past year, but hiring has yet to pick up. This is not good news. Two gimpy legs. Household wealth is going to fall down.
But what do you expect? This is a Great Correction, isn't it?
If you listen to the financial media, the State of the Union, or the stock market you'll get a very different impression. Or just re-read the article above. It says "...the job market is barely improving." In fact, it's not improving at all. It's getting worse. The population is growing. If employers don't add new jobs, it means more people out of work.
Housing? Same story. It's not "barely improving." Houses are still losing value.
We could ask sarcastically: "So, where's the recovery?"
But why bother? You know as well as we do that there is no recovery. And there's not going to be a recovery.
Instead, the economy has to move on...to something new. If the financial and political authorities suddenly came to their senses, we could imagine that a couple of rough years of bankruptcies and losses would be followed by a long period of new growth.
But we weren't born yesterday. This is not a dream. It's reality. And if our new theory is correct, the authorities are not going to come to their senses. Because they're paid not to. Ben Bernanke has to believe his crackpot activism will pay off. Otherwise, he'd have to renounce the whole project...and admit that he's been a fool. He'd also be out of a job - because neither the bankers nor the politicians would allow the chips to fall where they may. Hey - they own those chips!
But couldn't the feds all get a Ron Paul makeover and come to see that their interventions were actually making thing worse - by adding even more debt and delaying the necessary adjustments?
Nope. Not gonna happen. Remember, a government is the result of natural selection, not rational thought. Its primary objective is to survive. And it does so by protecting its niche - at all cost.
Peter Orzag, writing in The Financial Times:
Most fundamentally it is difficult to see how the medium-term federal deficit can be reduced to sustainable levels without additional tax revenues from those earning less than $250,000 a year. And yet it is equally difficult to see the political system embracing that reality without being forced to do so by the bond market. The feds cannot suddenly stop rigging the system for the benefit of their favored groups and supporters. A flesh-eating dinosaur can't suddenly become a vegetarian.
The elite, the privileged, the parasites and the zombies are the feds' base of power. Lose them and the government is out of business.
Regards,
Bill Bonner,
for The Daily Reckoning
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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 atjoel@dailyreckoning.com
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| |  |  |  | A Few Suggestions to Improve the State of the Union
I’m proposing a balanced federal budget. What was the matter with George W. Bush, anyway? It’s not that hard. You just figure out how much you’ve got to spend and you don’t spend a penny more. Simple arithmetic. The budget deficit for this year? Zero.
Purchasing Power of US Assets Declines With the Dollar
Budget Cuts in the Irrational Financial System | New World Order: Food Price Inflation; House Price Deflation
You can tell by my bleary, bloodshot eyes...that I have been holed up in the Mogambo Armageddon Bunker (MAB), scared out of my mind about the inflation in prices that is surely going to consume us, thanks to the unholy Federal Reserve creating...So Freaking Much Money (SFMM).
A Three-Minute Lesson in Gold Investing
China’s US Assets Fall With the Dollar | If We Were in Charge
With regard to equity market valuations, other factors equal, as the capital base erodes, so does aggregate corporate profitability. Fewer factories = fewer profits. That said, if there is inflation, then the price level and headline revenues may continue to increase, but real economic profits will nevertheless decline.
Soaring Inflation Could Become as Destabilizing as Europe’s Debt Crisis
New World Order: Food Price Inflation; House Price Deflation | |
| | The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. |  | |
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