Stocks of the world rise… has the “Obama Rally” finally arrived?
Capitol Hill breaks out the checkbook… bailout bills for automakers, public works in the making
India, South Korea and China mull stimulus too… Rob Parenteau on the implications
A historic chart reveals “chance of a lifetime” for this stock sector
Byron King on $40 crude… how “bad news” for the industry could be profitable for you
We were expecting an “Obama Rally” after the election… unfortunately, beginning Nov. 5, the stock market dropped five out of the following six days, ending down 17%. A second bear leg began a few days later and helped the Dow retest tech wreck lows.
Today, however, we may be seeing the O.R. in action, courtesy of central bankers gone wild the world over.
The U.S., India, China, and South Korea are all mulling some kind of new effort to save us from ourselves this morning. Investors all over the globe love it.
The Dow itself opened up 250 points today — and, as we’re nearing broadcast time, is still trading 3% higher.
Looks like the Big Three automakers are going to get about half of the $38 billion in “bridge loans” they were asking Congress last week. We’ll let the financial media dribble the details all over you.
In a similar fold, Barack Obama promised over the weekend to make “the single largest new investment in our national infrastructure since the creation of the federal highway system in the 1950s."
The latest price tag on this “stimulus plan” exceeds $700 billion (naturally, since the Bush administration got to have that much on its bailout bill). Nancy Pelosi and other House Democrats have promised to have a bill ready for Obama to sign on Jan 20, the first day of his presidency.
Not to be outdone, the governments of India, South Korea and China made rescue package news of their own . Indian officials announced an array of stimuli aimed at softening the economic fallout of the recent terrorist attack. Among the measures: A $4 billion stimulus, a 100 bps slash of the country’s key lending rate, new lending incentives and a variety of tax cuts.
South Korea offered some similar stimuli early this morning. Their government unveiled several new measures aimed at keeping small businesses afloat during tight credit conditions, and also bolstering the South Korea auto industry. The Korean central bank is also expected to slash its interest rates at its next meeting.
Last, Chinese officials publicly weighed plans this morning to expand the $586 billion stimulus package they created in November. Chinese investors bought shares on rumors of income tax cuts, export stimuli and possibly more direct government stock market injections.
“The economic news is harsh enough,” notes Rob Parenteau, picking up where Kurt Richebacher would have left off, “to throw fiscal stimulus efforts into high gear. The Fed and other central banks are going even deeper into unconventional policy measures. With households and firms still trying to increase their saving or improve their cash flow by cutting expenditures, even a full-court press on policy stimulus is likely to run into the harsh reality that private credit excesses still need to be unwound.
“While many foreign central banks were still busy slicing policy rates this week, it is clear the Fed is moving beyond simply targeting the fed funds rate in its interest rate manipulation efforts. The Fed has reduced money market rates and announced mortgage-backed securities purchases that have helped bring mortgage rates down. Also this week, Chairman Ben Bernanke suggested the Fed will next go after Treasury bond rates, which are already at historical lows.
“The Fed’s liquidity injections have been mostly locked up in asset markets. Loan growth has slid and investors have sought to hoard liquid assets to reduce their exposure to further losses. This hasn’t prevented output, employment and incomes from entering a downward spiral. Slowly, but surely, the world is moving from socializing financial losses to socializing income and production in a fashion which Dr. Richebacher would have no doubt found nightmarish.”
“Unprecedented power has [already] been unleashed by the federal government,” writes Doug French from the Mises Institute. “Between actions by the Federal Reserve, the TARP, guarantees made by the FDIC,” he says, citing the research of Jim Bianco, “and other direct bailouts, the total comes to nearly $8 trillion. That’s over 30 times the inflation-adjusted cost of the S&L bailout.”
“All of this monetary pumping hasn’t put anyone to work. The Labor Dept. reports that 533,000 jobs were lost last month. And if part-time workers wanting full-time work and anyone who has looked for work in the last year unsuccessfully are added to those who are included in the official unemployment rate, the total amounts to a 12.5% unemployment rate, according to The New York Times, ‘the highest level since the government began calculating the measure in 1994.’
“But the argument is that we must be patient with our wise men at the Fed and the Treasury. Monetary policy takes time to work, but rest assured, the mistakes of the 1930s will not be made again. After all, Ben Bernanke is an expert on the Great Depression, we’re told over and over. He knows what to do to make sure it doesn’t happen again.”
For an unconceited explanation of why these massive stimulus programs are ill-fated at best — and why the Obama Rally is unlikely to continue for long — we recommend French’s excellent (and short) explication of “the fatal conceit” practiced by policymakers around the world. You can read it here.
Today’s rally in the U.S. is also courtesy of some leftover buying glee from Friday. The Dow went for a wild ride on Friday after the employment data bombshell. The index swooned to a 300-point loss early on, but then steadily fought back for the rest of the day, ultimately ending with a surprising 3% gain.
Not too shabby (smart?) for the biggest monthly job loss since 1974. The S&P 500 and Nasdaq fared even better, up 3.5% and 4%.
As investors regain their appetite for risk, the dollar is getting shellacked. The dollar index has fallen almost two full points from the peak of equity pessimism on Friday, to a score of 85.8 today.
“Anytime it appears there could be a light at the end of the tunnel,” explains Chuck Butler, “the fundamentals come back into focus (somewhat, because if they really came into focus, we would see dollars selling like funnel cakes at a state fair) and the dollar gets sold.
“The markets think they see a glimmering light this morning, as it appears the Big Three will get some cash from the gov’t. This glimmering light always bring with it a chance for the high yielders to rebound, as risk takers stick their toes back into the chilled waters of carry trades. And that’s exactly what we saw overnight, with the Aussie, kiwi, real and rand all with strong rebounds versus the dollar. The glimmering light also lets gold shine. So the commodities and the commodity currencies all look better this morning.”
Indeed, gold is firming up this morning. It’s up $35 from its Friday low, to $775 an ounce.
Friday, we consider a divergence in the historic gold-to-crude oil ratio. Today, courtesy of our friends at Casey Research , we’ll take a look at another: the ratio between gold and gold stocks.
“The previous low point,” explains the group, “for the ratio of the XAU gold stock index to the price of gold was 0.16, when gold was trading around $270 an ounce, in October of 2000. Today, the XAU is trading a mere 57% higher than it was in October of 2000, compared with a gold price that has increased by 184%. As a general rule of thumb, anytime the ratio is above the 25-year average is the time to sell, and below its average says gold stocks are cheap.
“With the ratio bouncing off the lowest level since the inception of the XAU Index, it signals a SCREAMING buy for gold stocks!
“Picking the bottom of any market is nearly impossible, but knowing when something is grossly undervalued can be easy. Gold has long been considered a hedge against inflation, and with trillions of new government bailout dollars ready to circulate into the system, buying precious metal stocks at these distressed prices is the chance of a lifetime.”
Light sweet crude has bounced off its remarkable four-year low of $40 a barrel. Riding shotgun with the rest of the surging commodities today, oil is up $3, to $43, a barrel as we write.
“The ‘energy scarcity’ issue has morphed again,” notes Byron King. “The immediate issue is that aggregate oil demand is declining. This is because of the worldwide economic recession. So oil prices are falling. Certainly, for the short term — for the next year or so — there is just ‘too much’ crude oil floating around, figuratively as well as literally. Russia’s Vladimir Putin does not think that things will turn around until mid-2010, and he may well be right.
“World oil stockpiles are actually growing. Recall the story I passed along, about large operators like BP and Shell leasing tankers just to store oil at sea, evidently hoping for higher prices in the future. This has to scare the bejesus out of the nice people at Opec. Really, how can you run a decent oil cartel when there are large stockpiles of your main product out there just for the asking? It’s bad for business.
“What does it all mean? Oil at $147? $77? $47? It’s not that one oil price is better or worse than another. On any given day, the price is just the price. You pay your money and you take delivery. But days turn into weeks and months and years. The energy industry — the oil industry, in particular — works in time frames of decades. So the wild swings in short-term pricing make long-term planning nearly impossible.
“Oil at $43 just won’t support certain kinds of investment. Many new projects will be deferred, and many marginal wells will be closed… a lot of U.S. oil output from stripper wells will just go away forever. That’s certainly bad news. When the world needs that output in a few years, it won’t be there. And the lack of supply will put Opec back in the driver’s seat.”
Until then, enjoy your price at the pump . The national average has plunged to a fresh five-year low. The U.S. average has fallen 22 cents in the last two weeks alone, and now sells for around $1.71 a gallon. Incredible… only five months ago, the average American was filling up for $4.11 a gallon.
“I believe the 6.7% unemployment rate reported by the BLS is not directly comparable to the unemployment rate of 1933,” writes a reader in response to our chart comparing the two. “Modern U.S. government spin. Today’s BLS report contains a figure on line U-6 of 12.5%, which I believe is more comparable and is only slightly behind the 15% in 1931. I fear we are on a guide slope for unemployment very similar to that of the Great Depression.
“Let’s hope we are both wrong.”
“I’ll bet your chart,” writes another, “would look a lot more like the ’30s chart if you included the unemployed not currently collecting unemployment benefits, which I believe is what they did back then. The change to count unemployed only if they are collecting benefits occurred more recently, to mask the true numbers of unemployed. Am I wrong?”
The 5: Indeed, as our friend Aussie Joel pointed out in this morning’s Rude Awakening, the government stats watchdog John Williams puts unemployment at over 16%. You can review Williams’ methods in the Rude here .
Even The New York Times speculates, as we cited above, the rate is closer to 12.5%.
Truth is, the Bureau of Labor Statistics still reports all the figures used by Williams and The New York Times on its Web site , but it’s the bottom figure, with all the bells and whistles netted out, that the financial press like to report. Our point on Friday was simply this: Even as bad as the media seem to think the economy is now, we’ve got a lot of room to go before we hit early-1980s levels, let alone those of the Great Depression… unprecedented levels of stimulus or no.
The 5 Min. Forecast
P.S. Roger Ebert, the nation’s most recognizable movie critic, named I.O.U.S.A. among his list of the top five documentaries this year. The London Times says it’s one of the best 100 films overall. And we’re told it was extremely well received at the International Documentary Festival in Amsterdam last week.
Given all the hullabaloo, we suppose we shouldn’t be surprised by the type of media requests we’ve been fielding.
Last week, we received a copy of an interview we did with MTV, conducted by one of "Canada’s 25 Hottest Women," according to Maxim magazine. We also sat for two interviews on the other side of the doc lens — one for a crew from Al Jezeera doing a documentary called Why The World Went Bust and another from a guy who grew up in the Soviet Union who is documenting the rise of China and the development of the very undemocratic institutions it uses to administer its version of Confucian capitalism.
Fourth and fifth interviews came from “The Power” channel on XM Radio (the African-American empowerment station) and an all-volunteer station asking if we could help their listeners “repattern” their relationships with money. Hmmmn…
P.P.S. How can you benefit from our most exclusive level of membership? Why not ask a current Agora Financial Reserve member… you can do so right here.