by Addison Wiggin & Ian Mathias
- The granddaddy of "less awful" numbers… Unpacking first-quarter GDP
- Guessing the Fed’s next move… Marc Faber on what’s coming no matter what
- An awful year for income investors… Jim Nelson on avoiding the minefields
- More stress-test leakage… Meaningless first-quarter bank profits
- Byron King on the real significance of China’s recent gold move
Well, “less awful” it is: The Commerce Dept. says first-quarter GDP dropped an annualized 6.1%.
That’s a tough number. Wonks, quants and analysts on Wall Street expected an annualized 4.6% decline. But the “official” number is still a minuscule improvement over the 6.3% rate for the fourth quarter of last year.
But lest you should strive to breathe easy, put the two quarters together and you have the weakest six months in the U.S economy since 1957-58. One more quarter of contraction and we’ll officially have the longest recession since the Great Depression.
One caveat: Commerce issues three estimates of quarterly GDP growth, and this is just the first. Expect revisions.
The GDP numbers form an interesting backdrop for today’s meeting of the Federal Reserve’s Open Market Committee. The Fed’s “deflation boogeyman” is retreating, for one. Personal consumption grew 2.2% in the first quarter… much better than the 4.9% decline in the previous quarter.
So what will the Fed do? Predictions in mainstream financial media run all over the map. One says the Fed will hold off on any more purchases of Treasuries and mortgage securities as long as “green shoots” (like the housing and consumer confidence numbers yesterday) keep showing up in the economic data.
Another speculates some sort of loose-money measures are in the offing to fight the economic effects of the swine flu outbreak.
“Extreme” Ian’s blissfully oblivious on vacation. Nor will “Dollar Bear” Dave and I hazard a guess. We’ll only remind you that in the Fed’s fantasy world, interest rates right now would be at minus 5%. And go from there.
“If a government is really determined to try and postpone an inevitable collapse by ‘printing money,’” writes our friend Marc Faber with his own guess, “in order to lift or support asset prices… it can be done.”
“The result of such a monetary policy is to lower the purchasing power of its paper currency, with catastrophic longer-term consequences for its economic and financial volatility.
"It forces individuals and institutions with cash, which is providing zero return now and whose return will stay negative in real terms when consumer prices increase again, to buy something. So this cash is channeled into gold and/or different paper currencies, commodities, equities, bonds, real estate and consumer goods and services, but, obviously, with different intensities and at different times.
“For instance, at some times, such as in 2008, more money will be allocated to gold; while at other times, such as since early March, more money will flow into equities and industrial commodities. It is well understood that these money flows are driven largely by speculative activity (and more than a little by manipulation.)"
“The result in all asset markets is very high volatility and price fluctuations that don’t appear to make any sense to most market participants and observers who don’t understand the new rules of the investment game that were brought about by money printing.
“This is where we are today.” High volatility is just what you want for Income on Demand (see the P.S. below).
Dr. Faber will be sharing his insights firsthand in July at our 10th anniversary Agora Financial Investment Symposium. He’s coming to help us commemorate “A Decade of Reckoning” and calculate a way forward from here. Early-bird registration closes on Friday, so come here for all the details.
U.S. stocks fell yesterday. “Stress test” rumors swirled, consumer confidence whirled, earnings hurled… but at the end of the day, stocks ended more or less where they began.
This morning, the Dow and S&P opened up more than 1%, oblivious to the GDP numbers and nonchalant about whatever the Fed might choose to do this afternoon.
“In the S&P 500, we’ve seen a record high number of dividend cuts and suspensions,” writes our income sleuth IJ Nelson, reminding us that for dividend seekers, 2009 is a year they’d sooner forget. “We’ve also seen a record-low number of dividend increases.”
“Obviously,” says Jim “dividend cuts mean the market is hurting. 2008 saw the largest drop of corporate net incomes ever. That includes the Great Depression. This year isn’t likely to be much better.
“Most S&P companies are being extraordinarily cautious. Worried board members are watching less money come in and trying to kick out less to shareholders. This tactic has already backfired on many, like Pfizer Inc., whose shares fell more than 23% since it slashed its dividend.”
“What it shows is that — especially now — income investors have to be more diligent. Most market downturns are easily navigated with dividend-paying stocks. This time around, you have to make sure your dividend payers are going to continue to do so.”
Yesterday, for the fifth time, a company Jim has recommended actually raised its dividend. Learn more about Jim’s strategy here.
Bloomberg’s sources say this morning that at least six of the 19 big banks undergoing Treasury “stress tests” will need to raise more capital. We know from yesterday Citi and Bank of America are just two. (No word yet on who the other four are. Official results are due Monday.)
Good time for Bank Of American to hold its annual board meeting today, huh? CalPERS, the largest government-employee retirement plan in California, will vote to give CEO Ken Lewis and all 18 directors the heave-ho. One analyst, plugging BoA’s numbers into the government’s stress test methodology, figures BofA needs to raise another $60 or $70 billion. So much for those first-quarter profits.
“The banks are only making money due to accounting shenanigans,” says Strategic Short Report’s Dan Amoss, “and will need to generate every dime they can from a fat net interest margin to offset the tsunami of loan losses coming in 2009-2011.”
Meanwhile, Dan’s latest play on an imploding finance-insurance-real estate sector is up 10.7% in just two days. We’ll keep you posted on more stress test-related trades as they arise.
Oil traders brushed off the bad news about U.S. GDP this morning. Nor did they give a hoot about higher-than-expected inventory numbers just out from the Energy Dept. Light sweet crude is back above $50 a barrel.
With stocks rising this morning, the safety trade is not… thus, the dollar index is off nearly a point, to 84.5. A falling dollar has brought gold back within a hair’s breadth of $900, reversing two days of losses.
“China is monetizing its gold!” exclaims Byron King after chewing for a few days on China’s announcement that its gold reserves have grown 76% over the last six years.
“It makes you wonder what the Chinese were thinking back in 2003,” he says. “I happen to know, courtesy of an acquaintance at the Naval War College, that the Chinese were quietly forecasting that the U.S. would destroy its dollar by going to war in Iraq.
“The Chinese gold purchases evidently were part of a slow and steady buying program between 2003 and the present,” Byron reasons.
“But in keeping with a nation where youngsters get their Sun Tzu with their mother’s milk, the Chinese went through an internal debate over whether to add the gold holdings to the official Chinese monetary reserves. That is, if the gold was not ‘monetary,’ then it was just another nonmonetary investment commodity like iron ore or copper or petroleum,” and it could be put on the books of a Chinese sovereign wealth fund.
“But now, with the announcement by the Chinese Central Bank, it appears that the debate is resolved. The gold has been added to Chinese monetary reserves. This action by China is part and parcel of an under-the-radar, global effort to rehabilitate gold as a monetary reserve asset.”
Byron’s assembling a strategy to take advantage of this behind-the-scenes action in gold… one that will make you “miserably rich,” as he puts it. Watch this space. We’ll let you know what he comes up with.
“Regarding Dennis Gartman’s comments recently,” a reader writes, “I can’t help thinking that there’s an outside chance that he MAY be the 21st century’s version of Irving Fisher, and end up suffering a major case of ‘foot in mouth.’ Just as Mr. Fisher did between 1929-1932, when he said prior to the crash, that ‘Stock prices have reached what looks like a permanently high plateau.’. And then again on the 21st of October, 1929, when he said that the market was "only shaking out of the lunatic fringe." Mr. Gartman seems to believe that the bottom is in.”
“To give Mr. Gartman his due, he is not making those comments from the same place that Mr. Fisher made his. However, if Mr. Gartman is correct and this IS a bottom, then if we are to have Dow 18,000, or whatever nominal number, it may be higher than today and surpass the previous highs. I cannot see how inflation will not be raging by that time. Whichever way one looks at it, this $18,000 per 1 Dow share will be worth significantly less in real terms under those conditions.
“I would love to know if Mr. Gartman is putting his own money where his mouth is.”
The 5: Come to Vancouver and ask him in person.
“Sorry,” a reader writes, “but I just have to answer the ‘earnest gentleman’ who says solar activity should be rising for the next few years.” We didn’t expect our item last week on climate change would have triggered a debate over the sunspot cycle, but there you go.
“Indications are that sunspot cycle 24 will be very weak, and, if one scientist in particular, Dr. Theodor Landscheidt, is correct, so will three or four more cycles after that. It’s crudely equivalent to turning the thermostat down in your house. The heat still comes on periodically, but the average temperature in the house gradually falls until it matches the new thermostat setting.”
“The next peak in sunspots should be around summer 2013, but overall, the sun has turned the thermostat down.”
The 5: What’s astounding about the climate debate is how confident everyone is in their own convictions.
Thanks for reading,
Addison Wiggin
The 5 Min. Forecast
P.S.: “Income on Demand opened me up to a whole new investment strategy,” writes our last reader today, “that has thus far been working like a charm. The guides are so well written that once I digested them, I started applying covered calls to not only the new recommendations, but to stocks I’ve held for some time. Right now, it’s my favorite Agora newsletter.”
Amen. And apologies again for the snafu yesterday. You can learn more about Income on Demand here…or call this correct number for more information: 1-866-361-7662.
P.P.S.: Just a short program note: We’re off this evening for a round of meetings in London. If you recall, we’re becoming a "big brother" to our Indian office. In London, we’re congregating to discuss what exactly that entails. But never fear, by hook or by crook, The 5 will still come your way.