Strange Gold and Dollar Moves, Record Setting Housing and Inflation Data, The Automaker Bailout, and More

by Addison Wiggin & Ian Mathias

  • Record-setting inflation and housing data… how your dollar and gold holdings reacted
  • Dan Amoss on Fed policy and “the likely outcome of this crisis”
  • Bill Jenkins shares a long-term currency trading opportunity
  • Rob Parenteau on stock picking during the credit crunch
  • The “Big Three” bailout crescendos… will Washington save the U.S. auto industry? Will China?

  Gold experienced a bit of “shoot first, ask questions later” rally this morning. It jumped $30 on the New York opener, and then fell back.

The dollar index did just the opposite, dropping a full point before recovering. Markets this jittery generally signal a trend-reversal on the way. That would mean, the dollar rally we’ve been seeing during the credit crisis this fall is teetering…   

  Consumer price and housing numbers provided the "quick flash" catalyst. Today’s consumer price index (CPI) confirmed what the consensus wanted to hear: Inflation concerns are on the back burner.

The CPI fell a record 1% in October. Like yesterday’s PPI report, energy prices were the driver of the sudden “price deflation.” Gas, for example, fell a record 14% during the month. Food prices in October rose 0.3%, but that was the smallest gain since May of this year.

The “core” consumer price index, which excludes food and energy prices, fell 0.1% — the first decline since 1982. The drop in the core rate caused traders to think “all-clear” at the Fed… rate cuts and more stimulus on the way…

  Housing data sank to a whole new level this morning, too.

Housing starts, the measure of builders breaking ground on new homes, fell 4.5% in October, to an annual rate of 791,000. The Commerce Dept.’s been keeping track of this sort of thing in 1959 — never has the annual rate been this low. Never.

Same with the department’s gauge of building permit applications. They plunged 12%, to an annual rate of 708,000. That’s 1,000 homes worse than the previous low, set in Mach of 1975.

  The National Association of Home Builders sentiment index fell to a score of 9 in November, down from 14 in October and the lowest level ever recorded. If there’s any hope for a housing bottom soon, it’s this: Sentiment can go only 8 points lower.

  “You can’t ignore the massive and limitless inflation schemes coming from the Treasury and the Fed,” urges Dan Amoss.

“Those fearing deflation assume that every American consumer is stereotypical: an overextended, credit card-addicted, house-flipping gambler. This is simply not the case. Many Americans don’t have a mortgage. And most Americans with mortgages are still making their payments. They have, however, temporarily reined in discretionary spending because of falling house and stock prices.

“Those fearing deflation also assume that demand for debt is low and falling. But demand for debt doesn’t always come from businesses or households looking to invest more or spend more. Any business or household looking to refinance existing debt at lower rates — and there are many — is a source of demand for new debt. Banks borrowing at the Fed window at 1% or less will be looking to supply this new debt by make highly profitable loans to creditworthy borrowers.

“Once borrowers refinance, they may not be as aggressive about spending or expanding business as they used to be. But at least they will have access to credit. In the Great Depression, they did not. So the economy fell into a negative feedback loop of asset sales, bank failures and rising unemployment.

“Sure, such an action would guarantee a decade or more of stagnation in housing prices, but it would also slow or flatten the rapid decline in prices. This is the essence of the Treasury and Fed actions: to stop the deleveraging from getting out of control — even at the cost of future economic stagnation.

“Like it or not, I think this is the most likely outcome from this crisis.”

  "There is no wonder the dollar will weaken," Eisuke Sakakibara, Japan’s former top currency official told Asia Times yesterday. "The dollar now looks strong for a technical reason. The money the U.S. financial firms had invested in the world is being repatriated into the homeland, causing dollar buying. But once this conversion into the dollars is done, the currency will head south."

“Faced with the unprecedented growth of the U.S. budget deficit,” the Times explains, “and the prospect of an increasingly weaker dollar compared with the yen reducing the value of Treasury debt held by Japan, economists in Tokyo are calling for the administration of President-elect Barack Obama to issue U.S. Treasuries denominated in yen and other currencies…

"‘The U.S. will be forced to issue foreign currency-denominated U.S. Treasuries in its hour of need,’ said [Tokyo chief economist for Mitsubishi UFJ Securities Kazuo] Mizuno. ‘The U.S. cannot finance its deficit by itself. The U.S. financial system cannot survive without foreign investors. We will see “Obama Bonds” in the future.’"

Great… just what we need. An Obamanation.

  “Keep and eye on the sterling/dollar pair,” notes one of our currency advisers, Bill Jenkins. “I use it as a basis for looking at other currency pairs as well. With the pound at $1.50, we are now approaching, in the sterling, a multiyear low of $1.40.

“From a technical side, that figure has provided a good base for the last 16 years. The pound bounced off this low in 1992, and found it as a base for the end of 2000-early 2002. So if you care to speculate with the pound, you are close to a very good long-term buying opportunity.”

By the way, if you recall, a couple of months ago, we asked if you’d be interested in a currency trading service from Agora Financial. The answer was a resounding yes… so we went to work finding a trader and assembling a strategy we think suits. Bill Jenkins is our man. And we’re proud to announce we’re only a couple weeks away from putting his talents into service.

Stay tuned… we’ll keep you up-to-date.

Tuesday was another volatile, but ultimately uneventful day for equity investors. Stocks swung up, then down, then up again… major indexes finished up about 1%. Tech was the star of the show. HP issued a defiantly good earnings forecast for 2009, while Yahoo CEO Larry Yang announced his resignation, much to the delight of his shareholders.

And like the majority of 2008, banks were the dogs of the day. Despite announcing job cuts exceeding 52,000 employees, Citigroup’s shares fell to $7 a pop, a 13-year low.

  “With equity markets down over 40% peak to trough,” advises Rob Parenteau, “much of the damage is likely done, and if anything, price overshooting to the downside should reveal some selective bargains. Having said that, maximum earnings risk lies straight ahead, and very few portfolio managers have lived through a full-blown recession.

“Deep value investing styles — harkening back to the days of Benjamin Graham, even — may help identify possible buy candidates. High-dividend-yield stocks are only a place to start, since many dividend payments may be reduced as corporate profits are challenged in the quarters ahead. Low-debt, high-cash-holding and high-free-cash-flow companies should be favored, as well as companies with dominant market shares that may be able to take advantage of weaker competitors.

“Steady earnings growers, especially steady top-line revenue growers often found in the consumer staples, health care and utility sectors, are generally better placed to ride out an economic storm of this magnitude.”

  Alas, to Barney Frank’s chagrin, the New York Stock Exchange notified Fannie Mae yesterday that the firm is in danger of being delisted.
 


Put that in your pipe and smoke it

 
Shares of FNM have closed under $1 for over 30 consecutive days, which means it no longer qualifies to play on the Big Board. Fannie has until Nov. 26 to explain itself to the NYSE or else it’s off to the Nasdaq or OTC.
 

  Another of Barney Frank’s pet projects appeared before Congress this week. The CEO’s of the “Big Three” automakers marched to Capitol Hill and begged for a bailout yesterday and today. Oh, sorry, a “bridge loan.”
 


“A bridge to what?” we ask

GM’s CEO Rick Wagoner told Congress that his company has a 50/50 shot at having enough money to stay in business beyond the New Year. Should GM fail, “Societal costs would be catastrophic: 3 million jobs lost within the first year…and a government tax loss of $156 billion over three years."
 

  “The primary purpose of the bill,” said Hank Paulson yesterday, effectively slamming the door shut on an automaker bailout, “was to protect our financial system from collapse. The rescue package was not intended to be an economic stimulus or an economic recovery package.”
 
Votes to pass this proposed “bridge loan” don’t exist. Unless the Big Three can convince (buy?) several key Republican congressmen, it’s not going to happen.
 

  “Bankruptcy would be very disruptive,” Rep. Frank commented on the proceedings, speaking for his prime constituency.

“There is also an assumption that if you do bankruptcy, you could undo labor contracts. Now, the unions, to their credit, have negotiated some concessions. But you know, we already have too much union-busting and too much income inequality for the average worker in this country for us to now say by the way, if you’re a company and you haven’t been able to totally get rid of the unions, then go bankrupt and rewrite, write down the contracts.”
 

  “OK, this is what a nation gets when it screws up its economy and manufacturing base,” comments our former Navy pilot Byron King, who normally maintains an even keel. “Now the Chinese are seriously discussing buying GM or Chrysler… for pocket change.”

“This is more than just IBM selling its PC biz to Lenovo — which was traumatic at the time, if you recall. The strategic implications are immense — essentially causing the U.S. to exit the domestic car business. It’s not just cars… it’s the whole industrial base that supports building cars. From tires to paint to glass to seat belt clickers…. it’s all part of a gigantic industrial ladder that supports millions of jobs and thousands of communities.
 
“Thank you, politicians! Thank you, regulators! Thank you, auto unions! Thank you bankers! And thank you to the top brass for the shortsighted management for all these years! How will the American people react? Just accept this as a matter of orderly globalism? Yeah. Fat freaking chance. People will be looking for heads on a platter, for this one.

“Was this what it was like in old Rome? People strolling on the walls in August 410, looking out, saying to each other… "Hey, who are those funny-looking people camped out on the plains? Alaric the Visigoth? Never heard of him."
 
“Sic transit gloria mundi.”

  “My parents grew up during the Great Depression,” a reader writes. “It was pounded into my head as I grew up. One thing I learned was when a government is bankrupt and no longer can support its paper currency, or has any, it issues script. Scripts value is set by government fiat. It’s worth what the issuing government says it is worth.

“My grandfather was paid with script issued by the city of Detroit when he was a Detroit cop and the city was bankrupt. The difference between Detroit and the federal government is the city of Detroit bought back its script and the federal government hasn’t and won’t. Ever! The Depression never ended. It was alleviated by the wartime production.

“The difference between the Great Depression and now is the Federal Government was quite wealthy then as opposed to the bankrupt government of these modern times. During the Great Depression the Fed pumped money into the economy but never enough to relieve the depression until the WW2 when the US became the war materials supplier to the ‘Free World.”’

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. Don’t forget, we’re expecting a major announcement tonight, one that could revolutionize investing. Our go-to technology analyst Patrick Cox believes it could do for investors in the 21st century what railroads, cars and computers did over the past 100 years. Learn more here.

P.P.S. We’re also taking requests for the second installment of our Emergency Retirement Recovery Series of Webinars . This one features Chris Mayer and a deeper look into his Chaffee Royalty program… to sign up for free, visit this page.

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