Bernanke & Inflation, Why the Rally Might Continue, A China Play and More!

by Addison Wiggin & Ian Mathias

  • Economy got you down? Never fear, Ben Bernanke’s here
  • Why bear market rally might still have room to run
  • 1 in 5 homeowners “underwater”… 2 data points suggest the worst is yet to come
  • As stocks climb, dollar falls… one currency that will continue to outperform the greenback
  • Chris Mayer on China’s fuel of the future: “It may surprise you”

  Markets make opinions… even of Federal Reserve chairmen:

The Throwback Bernanke: Made W/Real Cane Sugar

  “I think we are in much better shape than we were in September and October,” Mr. Bernanke testified yesterday, often speaking in a manner that, gulp, even a congressman could understand. That the S&P 500 had just inched positive for the year  provided ample cover for the chairman’s tepid confidence.

“The pace of contraction may be slowing,” he added, riffing on the “glimmers of hope” theme offered by the Obama White House 3 weeks ago. “We continue to expect economic activity to bottom out, then to turn up later this year.”  


And inflation? The chairman says he’s on it: “I just want to assure the American people that we are very focused, like a laser beam . . . on this issue of the exit and of making sure that we have price stability in the medium term… we understand the necessity of winding this down in an orderly way at the appropriate moment so that we will not have inflation problems on the other side.


“Our forecast is still for inflation to remain quite contained for the next couple of years,” he assured Congress. There’s really no need to worry… until it becomes a crisis (which it likely will, considering his forecasting history).

  The Dow, responding in kind, opened up 1% this morning. Following minor losses yesterday, the market turned positive after the ADP jobs report hit the wire this morning. More on jobs in a moment…

But first, let us remind you, history shows this rally still has room to run:

The current rally is smaller — in order of magnitude and duration — than the average Great Depression rebound. Should history rhyme, we still have another 5% to the upside and more than 20 days to go.

Here’s the “money” lesson: Despite five rallies from 1929-1932 that exceeded 15% — including the doozy that soared almost 48% — the Dow fell from 300 to 60 over the same period. That’s an 80% crash.

Caveat emptor.

  “875 is the number to watch on the S&P 500,” notes Wayne Burritt, architect of Easy Money Options  “Because the market reversed course to the downside Feb. 9 and at that level (875) that peak is called — in technical parlance — a ‘resistance’ level.

“The market also failed to penetrate this resistance level just a few trading days earlier, on Jan. 28. All told, that means 875 is a pretty tough point for the market to get above. That’s why the market’s most recent action is more significant than most investors and traders are thinking: It smashed above key resistance at 875 like a walk in the park. No doubt about it, that shows uncommon technical upside strength.

“Here’s the best part: When the market breaks through resistance — especially after failing to do so in previous attempts — that resistance level has an excellent chance of becoming a stopping point when the market decides to turn down again.

“In other words, strong resistance — once defeated — becomes solid support for future price action. So when the market pulls back — and it surely will — it’s very likely to not fall too much below 875.”

And if the S&P 500 fails to find support at 875? All bets are off. If you’re looking to trade the swings, be sure to check out Wayne’s recommendations… here.

  Whatever happens in the stock market, the economy has a lot of wreckage to sort through yet. For example, a study released today from reveals 21% of American homeowners owe more than their homes are worth.

Incredible, eh? One out of five homeowners is “underwater.” That’s 21 million people losing sleep at night wondering if they’re going to make it through this market.

"A combination of falling prices and low down payments has left many borrowers underwater," said Stan Humphries, a Zillow VP. He noted that some markets in Nevada and California have "more than half of all homes in negative equity."

Las Vegas takes the prize — a stunning 67.2%.

  And manufacturing is still a mess. The economy will contract for all of 2009, forecasts the ISM today, parrying Bernanke’s late-year recovery.

The thrust? The semiannual purchasing managers outlook predicts a 14% drop in revenue for the manufacturing sector. And 5% for service businesses. Compared with the most recent survey, that’s a disaster. In December, managers expected a 1% fall in 2009 revenues.

Both sectors can expect employment to drop for the rest of the year.

  Indeed, the U.S. private sector lost 491,000 jobs in April, the payroll manager ADP reports today. Since the Street was braced for a 645,000… that’s not bad. Compared to March’s 708,000 loss, half a million almost feels encouraging.

Employment for people who actually “make things” things doesn’t look so good. Manufacturing dropped 159,000 jobs — the 38th consecutive month of net losses. Construction shed 95,000, a net loss for the 27th straight month.


The Labor Dept. is expected to report up to 630,000 job losses in April on Friday, with official unemployment rising to 8.9%.

   Bank of America is hogging the spotlight again. An unnamed exec there told the press that BoA has essentially failed the government’s “stress test.” Bank of America, apparently, needs another $34 billion in capital to stay afloat.

Naturally, shares of BOA opened up almost 10% this morning.

   And if you thought this stress test business wasn’t gaudy enough, perhaps the “debt test” will do it for you.

Any bank wishing to pay back TARP loans money will likely have to undergo a “debt test,” the Treasury Dept. leaked today. Essentially, a bank will have to prove that it can find a market for its bonds without an FDIC backstop, one of the benefits of being under TARP protection.

Heh. The moment they put their hand out… willfully or not… these banks were doomed. No bank will be able to simply “give the money back”… are you kidding? Ha! There will be tests, favors, takeovers, back-scratching, bribes and at least one new scandal. Wonderfully entertaining fodder for The 5… not such great news for the credit markets.

  The dollar continues to dwindle today. After a brief rally late yesterday, the dollar index is back below 84 this morning, thanks mostly to puffery in congressional testimony.

Still, right now, “the Aussie is leading the way,” notes our currency man Bill Jenkins. Indeed, the down under currency is up about 15% from March lows — a 10-cent jump against the greenback, to 74 cents.

“Just yesterday, we locked up 76% profits (and climbing) on the back of the Australian dollar. I’ve been pitching this idea for weeks, which gave all our readers plenty of time to get on board. As major currencies devalue themselves, the only ones that will have any value are the currencies of countries that efficiently produce useable, and, hence valuable, commodities.

“Money as we know it in the major currencies will become worth less, and the only currencies to increase in value will be those that are holding valuable goods! Unfortunately for most U.S. citizens, the U.S. dollar will no longer be considered a valuable commodity.

“Watch the appreciation of the commodity dollars, or ComDolls, with the weakening of the U.S. dollar. But don’t wait too long for your chance to profit!”

  Gold is holding steady just below yesterday’s high. The spot price rings in around $908 as we write.

  After a hefty rally yesterday, oil is pushing even higher today. Light sweet crude is up another buck, to $55 and change — a new new high for 2009. These days, as stocks go, so does the black goo.

  “The fact that China is going to have a lot of new cars on the road over the next decade probably does not surprise you,” notes our value maestro Chris Mayer. “China has about 35 million cars on the road today. McKinsey Global Institute estimates that China will have 120 million cars by 2020.

“What may surprise you is that China recently adopted fuel-efficiency standards for vehicles that are even stricter than in the U.S. currently. And what may surprise you even more is that methanol is the main alternative fuel. Think of it as the Chinese ethanol.

“Methanol is a clear liquid alcohol made mostly from natural gas, though China makes methanol using coal. China produces and uses more ethanol than anybody else. The main use is to blend methanol in gasoline. Already, taxi and bus fleets in China run on high-methanol blends. And retail pumps also sell low-methanol blends, similar to the way U.S. gasoline stations have low-ethanol blends.

“Even though China makes a lot of methanol and is adding more capacity, it still imports methanol. As you can see from the nearby chart, Chinese imports have climbed recently.

“It is good to sell what the Chinese need. And their capacity is on the high-cost side of the spectrum. Prices for methanol in China are the highest in the world, at $240-250 a ton. In the latest issue of Capital & Crisis, I recommended readers buy the world’s largest producer of methanol, which also happens to be the low-cost producer.”

Not a subscriber? C’mon… this pick alone is worth the price of admission. Get details, here.

  “So one of your readers is just fine with China controlling the world’s rare earth metals as opposed to our ‘cowboys,’” writes a reader, clearly peeved with yesterday’s inbox. “Said reader must be a little short on the last 40 or so years of Chinese history. Does the Cultural Revolution circa 1969 or Tiananmen Square 1989 ring a bell?


“Freedom of the press is not very big over there, so maybe you did not notice it, but they have no problem killing thousands to millions of their own citizens as they see fit. I’m sure Americans are not even that high on their list.”

  “Addison,” writes another, “in my lifetime, the Chinese have conquered five sovereign nations and destroyed their individual and democratic rights. The Chinese are building their military up about as fast as it’s possible to build a military. And they’ve been doing it in part through industrial espionage using the computer and Internet technologies that Americans invented — so I have to take issue with the notion that all we’re good at is making bombs.


 “Who believes that stuff?


“I’m with you on Bush, but the Obama presidency is making me downright nostalgic. In an imperfect world, you have to recognize and choose the lesser of evils. The anti-war crowd doesn’t seem capable of that sort of choice, so they put us in the same category as China — which has killed at least 30 million of its own people in my lifetime, while supporting the North Korean slave state and destroying Tibet, Mongolia, etc. That’s a view that is offensive to the vast majority of Americans and, I would bet, the Agora readership.”


  “To your reader,” writes the last, “who detests the ‘delusional, slobbering cowboys in our military,’ perhaps he/she should consider going and living in a country such as China or Iran that doesn’t have those big bad bombs he’s so concerned about. If he/she had a brain in his/her head, he/she would realize that it is EXACTLY those big bad bombs and weapons that have kept the wolf away from our door — at least so far. Pinheads!” 


The 5: Perhaps, you’re right. Unfortunately, the damage the Bush administration did — while paying lip service to free markets and liberty — breeds this kind of skepticism. I suppose I should be less flippant about it…



Addison Wiggin

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