Advising Caution, Dow-Gold Parity, Stress Test Mess, Climate Debate, and More!

by Addison Wiggin & Ian Mathias

  • An April to remember for stocks… We offer a few notes of caution
  • Dow 5,000, gold $5,000? The chart you can’t afford to ignore
  • Fed prepares “stress test” results, banks cry foul
  • IMF estimates bailout cost, Washington cries foul
  • Reader mail: More than two sides to climate change debate

 Our guess: It’s akin to Samuel Johnson’s description of second marriages, “the triumph of hope over experience.”

Whatever. Wall Street is still getting its rally on.

The Dow and the S&P 500 wrapped up yesterday with minor losses. But for the month, the Dow rose 7.3%. The S&P posted its biggest monthly gain since March 2000.

Not that we want to rain on your parade. But as a public service, we remind you March 2000 was also the month the S&P posted a record high. Three years later, it sat 45% lower.


  “During the last two months,” writes Eric Fry in today’s Rude Awakening, “did any aspect of the economy actually improve? Sure, consumer sentiment bounced a bit – probably because the stock market bounced a bit – but every other measure of economic vitality displayed very little… well, vitality.”

  Case in point, this morning’s ISM manufacturing index. It reinforces the “less awful” theme that’s dominated this week’s data. In March, the number was 36.3. In April, 40.1.

A reminder, 50 is the magic number that indicates expansion. So the manufacturing sector is still contracting. And it’s been contracting for 15 straight months. But the pace of contraction is slowing down. Less awful.

  “One of the surest things in the investing world is a rally after a major downturn,” reminds Bill Bonner. “Typically, prices recover 20-50% of the previous decline. Then, there is another leg down.”

“At first, when the rally comes, investors are hesitant. They’ve just lost a lot of money. They don’t trust the market. They wait. Then, as prices rise more, they begin to pay careful attention and wonder: Is it time to get back in? Gradually, more and more commentators answer: yes. And so the money comes back into the stock market. A trickle at first. Then, a flood. Prices rise… and the financial press talks about a new bull market.”

“But if it is a real bear market, this is just a way of bringing naïve investors back into the market so they can be destroyed.”

  “While many in the media are now saying that things are looking up, and that the worst may now be over, I think it’s just begun,” says Doug Casey, confirming Bill’s outlook.


“For starters, stocks are cheap relative to where they’ve been over the last five years, but they’re not cheap relative to historic bottoms (e.g., 1 times book, around 6-8 times earnings – after big earnings cuts – and 6-10% dividend yields). Treasuries are in a bubble. And as hard as it has fallen, residential property has not yet bottomed.”

“But the worst is yet to come. And I’m not talking about student loans, car loans and credit card debt. Or Social Security, Medicare and Medicaid. Or the looming bankruptcy of most states and many municipalities. The real crisis will be in pension funds, commercial real estate and life insurance companies. The life insurers own mostly commercial real estate, mortgages and bonds; many will be totally busted, even before people start cashing in their whole life policies. You don’t even hear about these three things in the press yet.”

“Of course, that’s all in addition to the fact half of U.S. hospitals are currently running at a loss – even before legions of the poor start really overwhelming their emergency rooms. And the balance of trade deficit has yet to turn around and go positive – which will be devastating to both the dollar and the average American’s standard of living.”

Doug is a perennial favorite at the Agora Financial Investment Symposium, along with Bill Bonner, Rick Rule and James Howard Kunstler. They’ll be joined this year by Marc Faber, Barry Ritholtz and Dennis Gartman, among others. Truly an all-star lineup to commemorate “A Decade of Reckoning.” We hope you can join us this July in Vancouver. Today’s the perfect day to secure your slot, because it’s the last day of our early-bird discount. After today, it’s $300 more. So please, check it out.

  The stock rally is taking a breather as we write, the major indexes down around a half percent. Gold sits at $885, about a 3% loss for the week. The dollar index is up about a quarter percentage point today, at 84.6. Oil is treading water at $51.

  We don’t take note of the Dow-gold ratio on a daily basis, but for the record, it stands today at roughly 9:1. We mention this because Byron King sent along this chart going all the way back to the year Charles Dow created his famous index of blue chips.

For the uninitiated, let’s back up. The chart measures the number of ounces of gold it would take to buy the Dow Jones industrial average. So in 1980, for example, when the Dow sat around 800 and gold was $800 an ounce, the ratio was 1:1. At the height of the tech bubble in 1999, it was 44:1.

Notice where we are now… and where in all likelihood we’re going based on what’s happened before. “That last drop of gold, from 9 ounces to the 1-2 ounce range,” says Byron, “can bring a lot of hurt to the stock market along the way.”


“One way or another, we’ll see, say, $5,000… either $5,000 gold or $5,000 Dow. Even if the Dow stays at the current 8,000, that implies, say, $4,000 gold at a 2-to-1 ratio.”


“It ain’t over. Fat Lady is still warming up backstage.”

Byron’s just put the final touches on a strategy to put this trend to maximum advantage. He doubts few people will have the stomach for it, but the few who do will get “miserable rich.” No, that’s not grammatical, but he promises an explanation. Details coming to your inbox later today.

  Chrysler has its first date in bankruptcy court today. Everyone with their fingers in this – Chrysler, the White House, the United Auto Workers, Fiat – is hoping for a “surgical” reorganization lasting as little as 30 days. In the interim, Chrysler will collect $8 billion of federal aid.

If all goes according to plan, Chrysler will emerge owned 55% by the UAW, 8% by the government and 20% by Fiat. Can’t work out any worse than ownership by private equity or the Germans, can it?


  The Federal Reserve won’t release the results of “stress tests” on the 19 biggest banks on Monday after all. The Wall Street Journal says it’s been pushed back till Thursday. Bloomberg’s sources say bank executives are still arguing over the preliminary findings with examiners.

We can’t say we’re surprised, but doesn’t this make a mockery of the whole “stress test” metaphor? Imagine a heart patient just getting off the treadmill, and as soon as the electrodes are removed, he starts arguing with the doctors and technicians about what the lines and squiggles on the scope actually mean, desperate to avoid giving up his fried foods and two packs a day.

Rumor had it earlier this week that six of the banks – including Citi and Bank of America – will have to raise additional capital, probably by converting preferred shares to common.

  Meanwhile, Treasury Secretary Geithner told Congress members yesterday that he won’t be coming to them for more bailout money. At least he doesn’t think so. “He said ‘no, not in the foreseeable future and they’re hoping not at all’,” according to Sen. Kent Conrad (D-N.D.). That’s comforting.

  The International Monetary Fund has just estimated the American taxpayer’s tab for all of Washington’s bailouts, guarantees, backstops and other support of the financial system.

It’s $1.9 trillion over the next five years. $6,200 for every American man, woman and child.

In a sure sign the torch of world leadership is passing from American hands, Washington protested the estimate as way too high, faulting the IMF’s methodology. The IMF assumed 10% losses for the assets the Fed has taken onto its books. It also assumed the FDIC will have to get additional funding from Congress to rescue depositors at insolvent banks.

We, on the other hand, won’t be surprised if the IMF’s methodology turns out to be conservative.

  “For those opposed to the idea of global climate change, just remember one thing,” warns a reader. “If the End of Days are coming sooner, rather than later, then global climate change fits in perfectly with an economic collapse, wars, famine, pandemics, pestilence, the price of gold skyrocketing and all the other things prophesied about in the Good Book.”

“And if you don’t believe we’re fast approaching the End of Days, well, follow the Obama/Bush plan and borrow, borrow, borrow, cause I’m sure Keynes will take care of you. And as the Mogambo Guru would say, "Hahahahahahahahaha"

  “We do have global warming,” writes another, “and there are plenty of facts to show that the planet has been warming by about 0.5 degrees per century for the past 180 years. What is not factual is that humans or CO2 have anything to do with the global warming. The 0.5 degree/century warming started long before man started adding to the CO2 level, and the rate did not change when man doubled the CO2 levels.”

  “Yes, the Earth has been warming, for the last 1,500 years,” concurs another. “This is not man-made. If you look at the hockey stick that Al Gore uses in his presentation closely, you will notice that temperature goes up and CO2 follows. CO2 is a lagging indicator. Also, it makes up only 0.03% of the earth’s atmosphere.”

  “A reader yesterday uses as his justification for believing in global warming a report that icebergs are melting. I must refute. Icebergs have always been melting! What is not being reported is the fact that on east Antarctica, the temperature is dropping and the ice is expanding. The Australian quotes a Scientific Committee on Antarctic Research report stating that the South Pole had ‘significant cooling in recent decades’ and notes that ‘ice is expanding in much of Antarctica.’ The British Antarctic Survey is expected to confirm said Australian conclusions.”

  “Not so long ago, the current promoters of ‘global warming’ were predicting global cooling with their computers. Garbage in, garbage out. The real scam of the social control freaks is to have spun the terminology of the debate so that the real issue – human-caused global warming – is now simply ‘global warming.’ Thus, any data showing sea level rise or glacial retreat or melting thus ‘prove’ that humans are the cause.”

  “How can we take global warming seriously when its biggest mouthpiece lives in a McMansion, flies around in Gulfstreams and takes his family to dinner in Cadillac Escalades? Just another hypocritical example of do as I say, not as I do?”

The 5: We started this discussion a week ago, and it took a few days to generate a vigorous debate, but clearly, our readers have thought hard about this and they refuse to buy into a two-sided debate. Sort of reaffirms our faith in humanity. Sort of…

  Today’s May Day around the world. So as is our annual custom, we’d like to tip the coffee mug to our friends down the street from our office at Red Emma’s. May the revolucion treat you well, friends.

Have a good weekend,

Addison Wiggin

The 5 Min. Forecast

P.S.: We ran out of time before we could recap today’s meeting on our pending joint venture in India. But we will leave you with this quick tease: We’ve identified sources on the ground in three of four of the emerging BRIC – Brazil, Russia, India and China – economies. We think we have a very solid basis for offering guidance out of the economic malaise affecting the Anglo-European financial crisis.

P.P.S.: TiVo advisory: Resource Trader Alert’s Alan Knuckman will be on CNBC Monday at 8:00 a.m. Eastern Time.

P.P.P.S.: It wasn’t till yesterday that we realized we’ve now been writing this daily missive for two years. We completely missed the actual anniversary, which was last Sunday. But we didn’t want to let the occasion pass without acknowledging your readership and your support. Without you, this wouldn’t be possible.


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